##### Table of Contents



FORM 10-K/A   [X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 (NO FEE REQUIRED)
 For the fiscal year ended December 31, 2003 OR [   ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 (NO FEE REQUIRED)
 Commission File Number 2-39458 ERIE FAMILY LIFE INSURANCE COMPANY 
  Pennsylvania
    
    25-1186315(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification No.)
 100 Erie Insurance Place, Erie, Pennsylvania
    
    16530(Address of principal executive offices)
    
    (Zip code)
 Companys telephone number, including area code (814) 870-2000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.40 par value 
  Indicate by check mark whether the Company (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Company was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes  [X]
    
    No  [   ]
 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Companys knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act
of 1934). Yes  [   ]
    
    No  [X]
 Indicate the number of shares outstanding of each of the Companys classes of
common stock, as of the latest practicable date: 9,450,000 shares of Common
Stock outstanding on February 20, 2004. EXPLANATORY NOTE: This Amendment No. 2 to the Companys Annual Report on Form 10-K for the year
ended December 31, 2003 that was originally filed with the Securities and
Exchange Commission on March 8, 2004 as amended on April 1,
2004, (the Original Filing) is being filed to
amend Items 6, 7, 7A, 8, 9A and 15. In the Original Filing, the Company reported a
material weakness in the internal control over the processes used to determine
the recorded amount of deferred acquisition costs (DAC) and related DAC
amortization. During the second quarter of 2004 the Company completed its
evaluation of DAC accounting issues and has identified adjustments to its
previously issued financial statements that require restatement. As described
further in the footnote 18 to its financial statements, the Company has recorded
these adjustments and is hereby amending the Original Filing by filing this
Form
10-K/A. 1




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INDEX ITEM
NUMBER AND CAPTION
    

PAGEPart IItem 1. Business
    
    
    3Item 2. Properties
    
    
    7Item 3. Legal Proceedings
    
    
    7Item 4. Submission of Matters to a Vote of Security Holders
    
    
    7Executive Officers of the Company
    
    
    7Part IIItem 5. Market for the Registrants Common Equity, Related Shareholder Matters
and Issuer Repurchases of Equity Securities
    
    
    8Item 6. Selected Financial Data
    
    
    9Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    9Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 8. Financial Statements and Supplementary Data
    
    
    24Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
    
    
    50Item 9A. Controls and Procedures
    
    
    50Part IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    51Item 11. Executive Compensation
    
    
    53Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    
    53Item 13. Certain Relationships and Related Transactions
    
    
    53Item 14. Principal Accountant Fees and Services
    
    
    53Part IVItem 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
    
    
    54Exhibit 31.1Exhibit 31.2Exhibit 32
  2




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PART I 
 ITEM 1. BUSINESS Erie Family Life Insurance Company (hereinafter referred to as the
Company or Erie Family Life) is incorporated in the Commonwealth of
Pennsylvania and is primarily engaged in the business of underwriting and
selling nonparticipating individual and group life insurance policies,
including universal life, annuity and disability income products. The Company is owned 21.6% by the Erie Indemnity Company (EIC), 53.5% by
the Erie Insurance Exchange (Exchange) and the remaining 24.9% by public
shareholders, who are predominantly directors, agents and employees of EIC.
EIC is a Pennsylvania business corporation formed in 1925 to be the
attorney-in-fact for the policyholders of the Exchange, a
Pennsylvania-domiciled reciprocal insurance exchange. EIC, as
attorney-in-fact, has a fiduciary duty to act in this capacity on behalf of
the policyholders of the Exchange in addition to a fiduciary duty to its
own shareholders. EIC operates predominantly as a provider of sales,
underwriting and policy issuance services to the Exchange. EIC also is
engaged in the property/casualty insurance business through its wholly
owned subsidiaries, Erie Insurance Company, Erie Insurance Company of New
York and Erie Insurance Property & Casualty Company and through a
subsidiary of the Exchange, Flagship City Insurance Company. The Company,
EIC, the Exchange and its subsidiary and affiliates operate collectively
under the name Erie Insurance Group. Members of the Erie Family Life Board of Directors are the same as those of
EIC. Products The Companys portfolio of life insurance includes permanent life,
endowment and term policies, including whole life, mortgage and decreasing
term, group, and universal life insurance. In terms of face value, new life
business issued in 2003, 2002 and 2001 had a ratio of 9:1, 11:1 and 8:1,
respectively, of term insurance to whole life insurance coverage.
Contributing to this ratio of term insurance issued to whole life insurance
issued has been the introduction of a new generation of insurance products
in recent years. In late 2001, the Company rolled out its two newest
products  ERIE Target TermSM and ERIE Flagship
Term2SM. The ERIE Target
Term product has a minimum face amount of $100,000 and offers rate
guarantees for 10 years on all plans. The ERIE Flagship Term2, now Erie
Family Lifes most comprehensive term insurance plan for individuals
desiring substantial coverage, offers a minimum face amount of $100,000. Life insurance premiums and annuity deposits have been the primary sources
of cash inflows for the Company. Net life insurance premiums by class, as a
percentage of total sales, are as follows: For the year ended December 31,Class
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999Ordinary
Life (including Term, Whole Life and Universal Life)
    
    
    93.1
    %
    
    
    94.0
    %
    
    
    94.0
    %
    
    
    94.2
    %
    
    
    93.7
    %Group Life and Other
    
    
    6.9
    
    
    
    6.0
    
    
    
    6.0
    
    
    
    5.8
    
    
    
    6.3100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 The Company reinsures a portion of its business under a number of different
reinsurance agreements. The purpose of this reinsurance is to enable the
Company to write a policy in an amount larger than the Company is willing
to assume for itself. The Company currently reinsures with other insurance
companies the portion of the insurance coverage above desired retentions.
The retention limit on an acceptable risk is generally $300,000 per life
for individual coverage. For its disability income product, the Company has
a 50% coinsurance agreement with a nonaffiliated reinsurer. The Company has
a 50% coinsurance agreement, with a maximum retention of $300,000, with
nonaffiliated reinsurers for its ERIE Flagship TermSM and ERIE Flagship
Term2SM products. For its Erie Target TermSM product, the Company has a 90%
coinsurance agreement, with a maximum retention of $300,000, with
nonaffiliated reinsurers. 3




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##### Table of Contents



Life insurance in force totaled $27.1 billion, $23.2 billion and $18.9 billion at December 31, 2003, 2002 and 2001,
respectively. As of December 31, 2003, 2002 and 2001, $9.8 billion, $7.0
billion and $4.1 billion, respectively, of life insurance in force was ceded to other companies. The Companys most significant reinsurance relationship is with Generali USA Reassurance
Company (Generali) (formerly Business Mens Assurance Company of America),
which reinsures a portion of the Companys life and accident and health
business. At December 31, 2003, 2002 and 2001, the amount of in force life
insurance ceded to Generali/BMA totaled approximately $5.6 billion, $4.2
billion and $2.7 billion, respectively. Certain elements of revenue and expense reflect the requirements of
Financial Accounting Standard (FAS) 97. FAS 97 prescribes a uniform method
by which life insurance companies account for certain long-term insurance
contracts, specifically annuities, universal life, and other
interest-sensitive products. This method involves separating the premium
income into the premium portion (shown in revenue), which represents
insurance protection purchased, and the deposit portion, which represents
funds to be held at interest for future uses. Under this standard, the
deposit portion of the premium received is accounted for using methods
applicable to comparable interest bearing obligations of other types of
financial institutions. Annuity product offerings compete with other available investment products
including, but not limited to, common and preferred stocks, bonds, mutual
funds and other instruments. The Companys ability to attract policyholders
depends in large part on the relative attractiveness of its products
compared to other investment alternatives available. Factors such as the
interest rate environment and the performance of the stock market influence
this ability. The Erie Insurance Group affiliated property and casualty insurance
companies periodically purchase annuities from the Company in connection
with the structured settlement of claims. Considerations recorded as
annuity deposits in the Companys Statements of Financial Position from
structured settlement annuities sold to affiliated property/casualty
companies totaled $20,883,983, $18,563,579 and $12,878,769 in 2003, 2002
and 2001, respectively. Also included in the annuity deposits are annuity
contracts purchased by the Erie Insurance Group Retirement Plan for
Employees. Due to the current interest rate environment, the Erie Insurance
Group Retirement Plan for Employees did not purchase any annuities from the
Company in 2003. The annuity contracts totaled $148,705 in 2002 and
$4,513,441 in 2001. Deposits by class are as follows: For the year ended December 31,(in thousands)Class
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999Universal Life Deposits
    
    $
    13,326
    
    
    $
    12,176
    
    
    $
    12,238
    
    
    $
    11,198
    
    
    $
    11,792Annuity Deposits
    
    
    144,202
    
    
    
    175,509
    
    
    
    69,754
    
    
    
    51,060
    
    
    
    67,115$
    157,528
    
    
    $
    187,685
    
    
    $
    81,992
    
    
    $
    62,258
    
    
    $
    78,907
 Marketing The Company markets its products through independent agents in eleven
jurisdictions. The 2003 statutory direct premiums and annuity
considerations for those jurisdictions is made up of: Pennsylvania (63.0%),
Virginia (8.5%), Maryland (6.4%), Ohio (6.1%) and North Carolina (4.8%).
West Virginia, Indiana, Tennessee, Illinois, Wisconsin and the District of
Columbia collectively accounted for 9.6% of direct premiums and annuity
considerations. The policies sold are evaluated by the Companys
underwriting department which accepts or declines applicants for insurance.
Premium on policies which are accepted may be standard or rated, depending
on the nature of the risk. 4




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##### Table of Contents



Competition The Company operates in a highly competitive industry which consists of
numerous stock and mutual life insurance companies. A large number of
established insurance companies compete in states in which the Company
transacts business and many of these companies offer more diversified lines
of insurance coverage and have substantially greater financial resources
than does the Company. Competition is based primarily on price, product
features, availability of insurance products and the financial strength of
the Company. Insurance Liabilities The Company establishes and maintains actuarial reserves to meet its
obligations on life insurance, disability income and annuity policies.
These reserves are amounts which, with additions from premiums to be
received on outstanding policies and with interest on such reserves
compounded annually at certain assumed rates, are calculated to be
sufficient to meet policy obligations at death, disability or maturity in
accordance with the mortality and morbidity assumptions employed when the
policies are issued. Reserves for life insurance and income-paying annuity future policy
benefits have been computed primarily by the net level premium method with
assumptions as to anticipated mortality, withdrawals, lapses and investment
yields. Disability income reserves are calculated as two-year preliminary
term mid-terminal reserves plus unearned premium reserves plus claim
reserves. Deferred annuity future policy benefit liabilities have been
established at accumulated values without reduction for surrender charges.
Reserves for universal life and deposit contracts are based on the contract
account balance, if future benefit payments in excess of the account
balance are not guaranteed, or the present value of future benefit payments
when such payments are guaranteed. Variations are inherent in such
calculations due to the estimates and assumptions necessary in the
calculations. Interest rate assumptions for non-interest sensitive life
insurance range from 3.50% to 4.00% on policies issued in 1980 and prior
years and 5.00% to 7.25% on policies issued in 1981 and subsequent years.
Mortality and withdrawal assumptions are based on tables typically used in
the industry, modified to reflect actual experience where appropriate. Universal life and annuity deposits are credited with varying interest
rates determined at the discretion of the Company subject to contractual
minimums. During 2003, interest rates credited ranged from 4.25% to 6.00%
on universal life deposits and 3.00% to 4.80% on annuity deposits. Government Regulation The Company is subject to the corporate governance standards set forth in
the recently enacted Sarbanes-Oxley Act of 2002 and other recent changes to
the federal securities laws, as well as any rules or regulations that may
be promulgated by the Securities and Exchange Commission. Compliance with
these standards, rules and regulations, that have recently been enacted,
impose additional administrative costs and burdens on the Company. The Sarbanes-Oxley Act of 2002 (Act) was designed to better protect
investors by improving the accuracy and reliability of public company
disclosures. Management has implemented what it believes to be the
appropriate process both within the Company and with the Board of Directors
to comply with the requirements. The Company is also subject to supervision and regulation by the insurance
departments of the states in which it does business. Although the extent of
the regulation varies from state to state, generally the supervisory
agencies are vested with broad regulatory powers relating to the granting
and revocation of licenses to transact business, regulation of trade
practices, licensing of agents, approval of policy forms, deposits of
securities as for the benefits of policy owners, and investments and
maintenance of specified reserves and capital, all designed primarily for
the protection of policy owners. In accordance with the rules of the
National Association of Insurance Commissioners (NAIC), the Company is
examined periodically by one or more of the state supervisory agencies. The
last completed examination of the Company was conducted by the Pennsylvania
Insurance Department and covered the five years ended December 31, 2000. The Commonwealth of Pennsylvania follows the statutory accounting practices
minimum risk-based capital requirements on domestic insurance companies
that were developed by the NAIC. Companies below specific trigger points or
ratios are classified within certain levels, each of which requires
specified corrective action. The 5




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formulas for determining the amount of risk-based capital specify various
weighing factors that are applied to financial balances or various levels
of activity based on the perceived degree of risk. These formulas determine
a ratio of the companys regulatory total adjusted capital to its
authorized control level risk-based capital, as defined by the NAIC. The NAIC levels and ratios are as follows: Ratio of Total Adjusted Capital toNAIC Required
    
    Authorized Control Level Risk-BasedRegulatory Event
    
    Capital (Less Than or Equal to)Company action level
    
    2.0 (or 2.5 with negative trends)Regulatory action level
    
    1.5Authorized control level
    
    1.0Mandatory control level
    
    0.7
 Erie Family Life has regulatory total adjusted capital of almost $128.0
million and a ratio of total adjusted capital to authorized control level
risk-based capital of more than 7:1 at December 31, 2003. The Companys
ratios significantly exceed the minimum NAIC risk-based capital
requirements. The NAIC adopted the Codification of Statutory Accounting Practices
(Codification), effective January 1, 2001, as the NAIC-supported basis of
accounting. The Codification was approved with a provision allowing for
prescribed or permitted accounting practices to be determined by each
states insurance commissioner. Accordingly, such discretion will continue
to allow prescribed or permitted accounting practices that may differ from
state to state. The Company follows complete NAIC statutory accounting
practices, with no permitted or prescribed deviations from the Pennsylvania
Insurance Department. Employees Services of 151 full-time employees are provided through EIC. Five of the
employees are officers. Employee expenses along with other operating
expenses are paid by EIC and reimbursed by the Company on a monthly basis.
None of the employees are covered by collective bargaining agreements and
the Company believes its employee relations are good. Website Access to Company Reports The Companys annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and all amendments to those reports are
available free of charge on the Companys website at
http://www.erieinsurance.com as soon as reasonably practicable after such
material is electronically filed with or furnished to the Securities and
Exchange Commission. Also copies of the Companys annual report will be made available, free of
charge, upon written request. Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995: Certain forward-looking statements contained herein involve risks and
uncertainties. These statements include certain discussions relating to
underwriting, premium and investment income volume, business strategies,
profitability and business relationships and the Companys other business
activities during 2003 and beyond. In some cases, you can identify
forward-looking statements by terms such as may, will, should, could,
would, expect, plan, intend, anticipate, believe, estimate,
project, predict, potential and similar expressions. These
forward-looking statements reflect the Companys current views about future
events, are based on assumptions and are subject to known and unknown risks and
uncertainties that may cause results to differ materially from those
anticipated in those statements. Many of the factors that will determine future
events or achievements are beyond our ability to control or predict. 6




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ITEM 2. PROPERTIES The Company owns real property for investment purposes as provided in Schedule
I Summary of Investments Other Than Investments in Related Parties. This investment property, located
in Allentown, Pennsylvania, is leased to EIC and a nonaffiliated business.
Rental income for 2003 was $392,340. The executive and administrative offices
of the Company are located in the headquarters office of Erie Insurance Group
in Erie, Pennsylvania. The Company pays other members of the Erie Insurance
Group an amount determined by an agreement for office space and for the use of
facilities, equipment and services. 
 ITEM 3. LEGAL PROCEEDINGS The Company is not involved in any material pending legal proceedings other
than ordinary routine litigation incidental to its business. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted for a vote to shareholders during the fourth
quarter of 2003. EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated by reference from information with respect to executive officers
of the Erie Insurance Group set forth in Item 10 in Part III of this Annual
Report on Form 10-K/A. 7




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PART II 
 ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER MATTERS
AND ISSUER REPURCHASES OF EQUITY SECURITIES The Companys common stock is traded on the OTC Bulletin Board (OTCBB) under
the symbol ERIF. The Company had 913 shareholders of record of common stock
on December 31, 2003. Date dividends declared
    
    Dividends declared per shareFebruary 25, 2003
    
    $
    0.210April 29, 2003
    
    
    0.210June 10, 2003
    
    
    0.210September 19, 2003
    
    
    0.210Total
    
    $
    0.840March 5, 2002
    
    $
    0.210April 30, 2002
    
    
    0.210June 12, 2002
    
    
    0.210September 9, 2002
    
    
    0.210Total
    
    $
    0.840
 The amount of dividends the Company can pay to its shareholders without the
prior approval of the Pennsylvania Insurance Commissioner is limited by statute
to the greater of: (a) 10 percent of its statutory surplus as regards
policyholders as shown on its last annual statement on file with the
commissioner, or (b) the net income as reported for the period covered by such
annual statement, but shall not include pro rata distribution of any class of
the insurers own securities. Accordingly, the maximum dividend payout which
may be made in 2004 without prior Pennsylvania Commissioner approval is
$15,404,485. Dividends declared to shareholders totaled $7,938,000 in both 2003
and 2002. The following sets forth the range of high and low closing prices of the
Companys stock by quarter: 2003
    
    2002Low
    
    High
    
    Low
    
    HighFirst Quarter
    
    
    18
    1⁄2
    
    
    22
    
    
    
    20
    
    
    
    21
    3⁄4Second Quarter
    
    
    22
    
    
    
    23
    1⁄2
    
    
    20
    1⁄4
    
    
    22
    5/8Third Quarter
    
    
    19
    1⁄4
    
    
    23
    1⁄2
    
    
    21
    1⁄4
    
    
    22
    1/8Fourth Quarter
    
    
    22
    5/8
    
    
    29
    3⁄4
    
    
    21
    1/5
    
    
    22
    1⁄2
 8




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ITEM 6. SELECTED FINANCIAL DATA Years ended December 31 (Restated*)
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999(amounts in thousands, except per share data)Operating dataTotal net policy revenue
    
    $
    55,932
    
    
    $
    51,129
    
    
    $
    46,491
    
    
    $
    44,537
    
    
    $
    41,686Net investment and other income
    
    
    79,106
    
    
    
    70,765
    
    
    
    62,669
    
    
    
    63,876
    
    
    
    56,905Net realized gains (losses) on investments
    
    
    13,176
    
    
    
    (9,610
    )
    
    
    (19,646
    )
    
    
    6,960
    
    
    
    4,333Total revenues
    
    
    148,214
    
    
    
    112,284
    
    
    
    89,514
    
    
    
    115,373
    
    
    
    102,924Total benefits and expenses
    
    
    100,909
    
    
    
    96,063
    
    
    
    84,614
    
    
    
    78,075
    
    
    
    68,276Income before income taxes
    
    
    47,305
    
    
    
    16,221
    
    
    
    4,900
    
    
    
    37,298
    
    
    
    34,648Provision for federal income taxes
    
    
    14,818
    
    
    
    5,636
    
    
    
    1,698
    
    
    
    12,899
    
    
    
    11,504Net income
    
    $
    32,487
    
    
    $
    10,585
    
    
    $
    3,202
    
    
    $
    24,399
    
    
    $
    23,144Net income per share
    
    $
    3.44
    
    
    $
    1.12
    
    
    $
    0.34
    
    
    $
    2.58
    
    
    $
    2.45Financial positionTotal assets
    
    $
    1,629,563
    
    
    $
    1,378,451
    
    
    $
    1,161,846
    
    
    $
    1,015,845
    
    
    $
    954,175Notes payable to affiliate
    
    
    40,000
    
    
    
    15,000
    
    
    
    15,000
    
    
    
    15,000
    
    
    
    15,000Shareholders equity
    
    
    255,563
    
    
    
    217,188
    
    
    
    200,822
    
    
    
    192,796
    
    
    
    170,871Book value per share
    
    
    27.04
    
    
    
    22.98
    
    
    
    21.25
    
    
    
    20.40
    
    
    
    18.08Dividends declared per share
    
    
    0.84
    
    
    
    0.84
    
    
    
    0.78
    
    
    
    0.72
    
    
    
    0.66Average number of shares outstanding
    
    
    9,450
    
    
    
    9,450
    
    
    
    9,450
    
    
    
    9,450
    
    
    
    9,450
 *      See
Item 8 - Note 18. Restatement
of Previously Issued Financial Statements 
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following
discussion and analysis should be read in conjunction with the financial statements
and related notes found on pages 27-49, as they contain important information that
is helpful in evaluating the Companys operating results and
financial condition. As further described in Note 18, the Company has
restated its financial statements. Overview General Erie Family Life Insurance
Company (the Company) is a Pennsylvania life insurance company formed in 1967. The Company operates as one reportable life insurance segment, offering a range of
products and services. These products include nonparticipating individual and group life insurance policies, including fixed universal life. The
Company also sells fixed individual and group annuities and disability income policies. The Company markets its products through independent
agents throughout 10 states and the District of Columbia. The Company is owned 21.6% by Erie
Indemnity Company (EIC), 53.5% by Erie Insurance Exchange (Exchange) and the remaining 24.9% by
public shareholders. The Company, EIC and the Exchange and its subsidiaries and affiliates operate collectively under the
name Erie Insurance Group. Revenues and expenses The Company earns premiums principally
from the sale of individual life, group life and disability income insurance products. The
Company also generates a significant amount of investment income from investing premiums and deposits
received on fixed annuity contracts. Operating expenses principally consist of
insurance benefits provided, interest credited on annuity and universal life deposits, general
business expenses, premium taxes and commissions and other costs of selling and servicing the various
products the Company sells. 9




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Financial
stability The Companys profitability depends principally on the ability to price and
manage risk on insurance products, the ability to attract and retain deposit
funds and the ability to manage expenses. Specific drivers of the Companys
profitability include:  
    
    Developing and distributing competitive products;
    
    Pricing insurance products at a competitive level while enabling the Company to earn a margin over the cost of providing
benefits;
    
    Controlling expenses of acquiring policyholders and administering insurance products;
    
    Mortality and morbidity experience on individual and group life insurance, annuity and disability income products;
    
    Persistency experience, which affects the recovery of the costs of acquiring new business over the lives of the contracts;
    
    Returns on investments, including maintaining interest rate spreads over the amounts credited to deposit funds. In addition, external factors such as regulation, competition, interest rates,
taxes, securities market conditions and general economic conditions affect
profitability. Market Outlook According to the Life Insurance Marketing and Research Association, the 2004
growth in new premium for the industry is expected to be approximately 2%.
These reports also indicate that pricing in the primary life and life
reinsurance markets is holding firm or starting to climb, and underwriting
standards for the most part appear to be holding constant. In addition to these factors, the Companys production in 2004 will be affected
by our multi-line agents focus on property/casualty insurance underwriting
profitability and the absence of a companywide incentive program. Also,
beginning in 2004, ERIE will be rolling out the ERIEConnection® system to its
agents. This system will require a significant amount of time for agents to
become proficient in its use. The rollout of ERIEConnection® may have a
short-term impact on production. A rebounding stock market is also causing
equity products to have increased appeal when compared to fixed-rate annuity
products sold by the Company. Significant Transactions with Related Parties The Company, EIC and the Exchange share common facilities and services. The
costs of such common services are allocated to the Company based upon the
Companys usage. Additionally, EIC is the common paymaster for the Erie
Insurance Group. The Company reimburses EIC for operating expenses, including
salary and benefit costs. Operating expenses of the Company paid by EIC are
reimbursed on a monthly basis. The amount of these reimbursements totaled $26.1
million, $23.8 million and $18.5 million for 2003, 2002 and 2001, respectively.
No interest is charged or received on intercompany balances due to the timely
settlement terms and nature of the items. Employees performing services for the Company participate in the pension and
other employee benefit plans sponsored by EIC. Pension benefits are based on
years of service and salary. Pension costs are funded by EIC in amounts
sufficient to at least meet ERISA minimum funding requirements. The Company
reimburses EIC on a monthly basis for its share of pension costs. The Company,
through EIC, also participates in certain deferred compensation and
supplemental pension plans for certain executive and senior officers. The
amounts recorded by the Company for the deferred compensation and supplemental
pension plan are reimbursed to EIC as payments are made 10




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##### Table of Contents



under these plans. Amounts allocated to the Company from EIC for these pension
and other employee benefit plans, and included in the total reimbursements
noted in the above paragraph, totaled $1.2 million, $0.8 million and $0.5
million for 2003, 2002 and 2001, respectively. The Erie Insurance Group affiliated property/casualty insurance companies
periodically purchase annuities from the Company in connection with the
structured settlement of claims. The reserves held for structured settlement
annuities sold to the affiliated property/casualty insurance companies totaled
$201.9 million and $186.2 million at December 31, 2003 and 2002, respectively. The Erie Insurance Group Retirement Plan for employees purchases from the
Company individual annuities for some terminated vested employees or
beneficiaries receiving benefits. These are nonparticipating annuity contracts
under which the Company has unconditionally contracted to provide specified
benefits to beneficiaries in return for a fixed premium from the plan. Annuity
deposit balances outstanding relating to pension annuities sold to the Erie
Insurance Group Retirement Plan are $45.0 million and $47.3 million at December
31, 2003 and 2002, respectively. The Erie Insurance Group 401(k) plan for employees includes an investment
option in a Company group annuity. Annuity deposit balances outstanding
relating to 401(k) contributions from employees are $28.0 million and $25.1
million at December 31, 2003 and 2002, respectively. The Company has a $15.0 million surplus note payable to EIC. This note bears an
annual interest rate of 6.45%. Interest on the surplus note is scheduled to be
paid semi-annually, subject to approval of the Pennsylvania Insurance
Commissioner. The note will be payable on demand on or after December 31, 2005,
subject to approval by the Pennsylvania Insurance Commissioner. During 2003,
2002 and 2001, the Company paid interest to EIC totaling $1.0 million in each
year. During the third quarter of 2003, the Company issued an additional $25.0
million surplus note to EIC in exchange for $25.0 million in cash. This surplus
note bears an annual interest rate of 6.70% and is scheduled to be paid
semi-annually, subject to approval of the Pennsylvania Insurance Commissioner.
The surplus note will be payable on demand on or after December 31, 2018,
subject to approval by the Pennsylvania Insurance Commissioner. The Company
paid interest totaling $0.6 million on this note in 2003. Critical Accounting Estimates The Company makes estimates and assumptions that can have a significant affect
on amounts and disclosures reported in the financial statements. The most
significant estimates relate to valuation of investments, policy acquisition
costs, reserves for policy liabilities and guaranty fund liability accruals.
While management believes its estimates are appropriate, the ultimate amounts
may differ from the estimates provided. The methods for making these estimates
are continually reviewed and any adjustments considered necessary are reflected
in current earnings. Investment valuation Management makes estimates concerning the valuation of all investments and the
timely recognition of other-than-temporary declines in value of these
investments. When the decline in value of an investment is considered by
management to be other-than-temporary, the investment is written down to its market value. For all investments except limited
partnerships, the impairment charge is included as a realized loss on
investments in the Statements of Operations. For limited partnerships, the
impairment charge is included as a component of equity in earnings of limited
partnerships. All investments are individually monitored for
other-than-temporary declines in value. Generally, if an individual security
has in managements opinion depreciated significantly in value and has been in
such unrealized loss position for a significant period of time, management
presumes there has been an other-than-temporary decline in value. In making
valuation judgments, management considers the significance of the amount and
timeframe when fair value is below cost; financial condition of the issuer; a
significant drop in ratings by 11




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##### Table of Contents



Standard & Poors or Moodys; specific events that occurred affecting an investment; and specific industry or geographic
events. Deferred policy acquisition cost (DAC) asset The Company incurs significant costs in connection with acquiring new business.
Many of these acquisition costs, which vary with and are primarily related to
the production of new business, are deferred as an asset. At each balance sheet
date, the Company evaluates the historical and expected future gross premiums
and profits on its insurance and annuity products. The DAC on traditional life insurance products is amortized in relation to
gross premiums. Assumptions used for a specific year are locked-in;
therefore, amortization in subsequent years is not adjusted for changing
assumptions. Changes in estimated expected future gross profit on the annuity and universal
life products requires that the DAC amortization rate be revised retroactively
to the date of policy issuance. The cumulative difference related to prior
periods is recognized as a component of the current periods DAC amortization,
along with DAC amortization associated with the actual gross profits of the
current period. Lower actual gross profits in a period would typically result
in less DAC amortization expense in that period. The converse would also be
true. However, if lower gross profits were to continue into the future,
additional amortization of the existing DAC asset may occur. The Company periodically reviews the DAC asset to determine if it continues to
be recoverable from future income. If less than the full amount of DAC is
determined to be recoverable, a portion of such costs are expensed at the time
of determination. The amount of DAC considered realizable would be reduced in
the near term if the estimate of ultimate or future gross premiums or profits
is reduced. The amount of DAC amortization would be revised if any of the
estimates discussed above are revised. Insurance liabilities Significant assumptions underlying estimates of reserves for policy liabilities
include a variety of factors such as anticipated mortality, morbidity,
withdrawals, lapses and investment yields. Liabilities for life insurance and
income-paying annuity future policy benefits are computed primarily by the net
level premium method. Disability income reserves are calculated as two-year
preliminary term mid-terminal reserves plus unearned premium reserves plus
claim reserves. Deferred annuity future policy benefit liabilities are
established at accumulated values without reduction for surrender charges.
Reserves for universal life and investment contracts are based on the contract
account balance, if future benefit payments in excess of the account balance
are not guaranteed, or the present value of future benefit payments when such
payments are guaranteed. Variations are inherent in such calculations due to
the estimates and assumptions necessary in the calculations. Results of Operations Financial overview Net income increased to $32.5 million, or $3.44 per share, in 2003, from $10.6
million, or $1.12 per share, in 2002. Strong investment gains, improved spreads
on interest-sensitive products and solid premium growth contributed to the
financial results of 2003. 12




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##### Table of Contents



Revenues Analysis of policy revenue Total net policy revenue increased by $4.8 million, or 9.4%, to $55.9 million
in 2003. Total policies in force grew 7.7% to 290,290 at December 31, 2003,
from 269,632 at December 31, 2002. Net premiums collected on traditional life
insurance policies increased $3.0 million, or 8.5%, to $37.8 million in 2003,
from $34.8 million in 2002. Renewal premiums collected increased 9.9% and
contributed $2.9 million to the growth in 2003. The Companys ERIE Flagship
TermSM2 and ERIE Target TermSM products, introduced in late 2001, continued to
achieve exceptional growth by Company standards in 2003. Policies in force on
traditional products increased 7.5% to 201,492 in 2003, from 187,449 in 2002.
Life insurance in force continues to grow, totaling $27.1 billion at December
31, 2003, an increase of $3.9 billion, or 16.7%, over 2002. Life insurance in
force after consideration of reinsurance ceded increased 7.0% to $17.3 billion
at December 31, 2003. The Companys new generation of products are heavily reinsured, which allows
the Company to price the products more competitively and reduces underwriting
volatility. Under the reinsurance treaty for the ERIE Target TermSM product,
the reinsurer assumes 90% of mortality risk up to $3.0 million (the Companys
retention limit is $300,000) and assumes all mortality risk above that amount.
The reinsurance treaty for the ERIE Flagship TermSM2 product provides that the
reinsurer assumes 50% of mortality risk up to $600,000 (the Companys retention
limit is $300,000) and assumes all mortality risk above that amount. Premiums on a direct and ceded basis for the years ended December 31 are
reflected below. (dollars in thousands)
    
    2003
    
    2002
    
    2001Direct premiums
    
    $
    72,947
    
    
    $
    63,426
    
    
    $
    54,549Ceded premiums
    
    
    17,015
    
    
    
    12,297
    
    
    
    8,058Net premiums
    
    $
    55,932
    
    
    $
    51,129
    
    
    $
    46,491
 The increase in ceded premiums resulted from higher sales of the ERIE Target
TermSM and ERIE Flagship TermSM2 plans. The reinsurance premiums ceded on the
Flagship and Target Term life insurance products alone amounted to $12.8
million and $8.7 million in 2003 and 2002, respectively. Universal life products generated premium, net of reinsurance, of $13.4
million, $12.2 million and $11.0 million in 2003, 2002 and 2001, respectively.
Reinsurance premiums ceded on universal life policies totaled $1.2 million,
$1.1 million and $1.1 million in 2003, 2002 and 2001, respectively. Policies in
force on universal life products increased 5.3% to 50,306 in 2003 from 47,769
in 2002. Reinsurance arrangements for universal life products did not change in
2002 or 2003. Total annuity and universal life deposits, which do not appear as revenue on
the Statements of Operations, were $157.5 million, $187.7 million and $82.0
million in 2003, 2002 and 2001, respectively. First-year and single premium
annuity deposits, excluding deposits for structured settlements and deposits
for the Erie Insurance Group Retirement Plan, decreased $39.9 million to $100.7
million in 2003, from $140.6 million in 2002. The Companys ability to attract deposits depends in large part on the relative
attractiveness of its products compared to other investment alternatives.
Annuity deposits slowed during the second half of 2003 as the Company lowered
its credited interest rates and the equity market improved. For 2003, deposits
through July averaged $14.3 million per month, compared to $4.1 million per
month from August through December. 13




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##### Table of Contents



Analysis of investment-related income Net investment income increased $10.7 million, or 16.1%, in 2003 and $5.1
million, or 8.3%, in 2002. The increase in net investment income for both 2003
and 2002 was due to higher-invested balances in fixed maturities partially
offset by lower yields. The higher-invested balances were a direct result of
significant annuity sales in 2003 and 2002. The Company recognized net realized gains on investments of $13.2 million in
2003, and net realized losses of $9.6 million and $19.6 million in 2002 and
2001, respectively. Fewer impairments in 2003 contributed to the 2003 increase
in net realized gains. The Company recorded impairments on fixed maturity and
equity security investments of $3.4 million and $25.8 million in 2003 and 2002,
respectively. The Companys Equity in Earnings of Limited Partnerships decreased to $1.3
million in 2003, from $3.7 million in 2002. The Company recognized impairment
charges relating to mezzanine debt limited partnerships of $2.0 million and
$1.0 million in 2003 and 2002, respectively, driving the decrease in the
earnings of the limited partnerships. Benefits and expenses Analysis of policy-related benefits and expenses Net death benefits on life insurance policies decreased slightly in 2003 to
$15.2 million, compared to $15.5 million in 2002 and $13.3 million in 2001.
These benefits are net of reinsurance recoveries of $4.7 million, $2.9 million
and $2.5 million in 2003, 2002 and 2001, respectively. As noted previously in
the Analysis of Policy Revenue section, the Companys primary term products
are substantially reinsured. Random fluctuations in death benefits incurred can
be expected when mortality results are measured over a short time period due to
the small number of claims involved. These short-term fluctuations can
influence quarterly or annual results without impacting long-term profitability. Management believes that its
underwriting philosophy and practices are sound. Interest expense incurred on deposits increased $2.2 million, or 4.6%, in 2003
and $4.8 million, or 11.4%, in 2002. This increase can be attributed to the
growth of annuities on deposit. At December 31, 2003, the balance of annuity
deposits totaled $932.6 million, compared to $803.7 million at December 31,
2002, an increase of 16.0%. The Company has lowered its credited interest rates in both 2003 and 2002 to
reflect the current market conditions. Interest was credited on annuity and
universal life deposits in 2003 and 2002 at the following rates: Annuity
    
    Universal lifedeposits
    
    depositsJanuary 1, 2002February 19, 2002
    
    
    5.00
    %
    
    
    
    
    
    
    6.00
    %
    
    
    6.00
    %
    
    
    
    
    
    
    6.75
    %February 20, 2002October 7, 2002
    
    
    4.75
    
    
    
    
    
    
    
    5.50
    
    
    
    5.50
    
    
    
    
    
    
    
    6.25October 8, 2002December 2, 2002
    
    
    4.25
    
    
    
    
    
    
    
    5.00
    
    
    
    5.25
    
    
    
    
    
    
    
    6.00December 3, 2002February 24, 2003
    
    
    4.00
    
    
    
    
    
    
    
    4.80
    
    
    
    5.25
    
    
    
    
    
    
    
    6.00February 25, 2003March 10, 2003
    
    
    3.75
    
    
    
    
    
    
    
    4.70
    
    
    
    5.25
    
    
    
    
    
    
    
    6.00March 11, 2003May 14, 2003
    
    
    3.75
    
    
    
    
    
    
    
    4.70
    
    
    
    5.00
    
    
    
    
    
    
    
    5.75May 15, 2003June 1, 2003
    
    
    3.50
    
    
    
    
    
    
    
    4.70
    
    
    
    5.00
    
    
    
    
    
    
    
    5.75June 2, 2003July 9, 2003
    
    
    3.50
    
    
    
    
    
    
    
    4.70
    
    
    
    4.75
    
    
    
    
    
    
    
    5.50July 10, 2003December 31, 2003
    
    
    3.00
    
    
    
    
    
    
    
    4.70
    
    
    
    4.25
    
    
    
    
    
    
    
    5.00
 Surrender and other benefits decreased by $0.5 million to $1.3 million in 2003
and decreased by $0.5 million to $1.8 million in 2002. Surrender and other
benefits include life surrender benefits, matured endowments, disability
benefits and interest on death benefits. The decrease in surrender and other
benefits in 2003 resulted from changes in the Companys share of the
Pennsylvania Employees Group Life Insurance (PEGLI) pool. PEGLI is a voluntary 14




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##### Table of Contents



reinsurance pool that provides reinsurance coverage to primary insurers who
insure Commonwealth of Pennsylvania employees upon their retirement. The
Companys share of the PEGLI pool benefit expense was minimal in 2003, $0.6
million in 2002 and $1.0 million in 2001. The change in the Companys share of
the PEGLI pool is subject to fluctuations inherent in the underwriting of life
insurance products. Beginning July 1, 2000, the Company stopped receiving new
business from the PEGLI pool. Assets recognized by the Company for its share of
the PEGLI pool amounts to $2.6 million at December 31, 2003. The liability for future life policy benefits is computed considering various
factors such as anticipated mortality, future investment yields, withdrawals
and anticipated credit for reinsurance. The increase in future life policy
benefit expense increased $0.6 million, or 9.9%, in 2003 and increased $0.8
million, or 14.2%, in 2002. The required reserves increased with the success of
the newest traditional life insurance products, ERIE Target TermSM and ERIE
Flagship TermSM2, and with the increase in the Companys life insurance in
force after consideration of reinsurance ceded of 7.0% in 2003. The amortization of deferred policy acquisition costs increased $0.2 million to
$7.5 million in 2003 compared to $7.3 million in 2002 and increased $2.6
million from $4.7 million in 2001. For traditional life products, the amortization of DAC remained steady at
$3.8 million for 2003 and $3.3 million for both 2002 and 2001. The majority of increase in amortization
from 2001 to 2002 is attributable to the Companys interest sensitive products.
The DAC on these products is amortized in relation to estimated gross profits
in accordance with Statement of Financial Accounting Standard No. 97,
Accounting and Reporting by Insurance Enterprises for Certain Long-Duration
Contracts and for Realized Gains and Losses from the Sale of Investments (FAS
97). The Company periodically evaluates certain assumptions to ensure that
best estimates are determined and recorded in accordance with FAS 97. The Company
regularly evaluates the appropriateness of certain assumptions related to the interest
sensitive products as provided under FAS 97 and modifies (unlocks) assumptions as appropriate.
Normal charges for interest sensitive policies issued in prior
years, which totaled $5.1 million, $3.7 million and $3.1 million for 2003, 2002
and 2001, respectively. As a result of unlocking assumptions, the amortization of DAC
decreased by $1.4 million in 2003, increased by $0.3 million in 2002 and
decreased by $1.7 million in 2001. Analysis of other expenses General expenses, net of DAC additions increased $3.9 million to $14.9 million
in 2003, compared to $11.0 million in 2002 and decreased $0.8 million from $11.8
million in 2001. General expenses include wages and salaries, employee
benefits, data processing expenses, occupancy expenses and other office and
general administrative expenses of the Company. General expenses of the Company related to the acquisition and
underwriting of new policies are deferred as DAC. Commissions, medical
inspection and exam fees related to new business production and wages, salaries
and employee benefits of underwriting personnel are all deferrable. Salaries and benefits, net of DAC additions, increased $0.7 million to $9.2
million in 2003 and contributed significantly to the increase in general
expenses in 2003. The increase in salaries and benefits is attributable to an
increase in employees. Also contributing to the 2003 increase was a charge
related to the establishment of a reserve for litigation settlements of $1.0
million. The 2001 expenses include $0.7 million for the Companys share of the
severance benefit for the former President and Chief Executive Officer of the
Erie Insurance Group. This charge in 2001 was the main reason general expenses
decreased in 2002 compared to 2001. Direct commissions to independent agents include new and renewal commissions,
production bonuses and promotional incentives to agents. These direct
commission expenses are reported on the Statements of Operations net of
commissions received from reinsurers. The reported expense is also affected by
the amount of commission expenses capitalized as DAC. Commissions, which vary
with and are related primarily to the production of new business, are
deferrable as DAC. Most first-year and incentive commissions and some second-year commissions qualify for deferral as DAC. 15




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##### Table of Contents



Commission expense, net of DAC, decreased $1.1 million, or 29.6%, to $2.7
million in 2003, from $3.8 million in 2002. The portion of commissions on single premium deferred
annuities, not capitalized as DAC, decreased from $1.7 million in 2002 to $0.7
million in 2003 due to a decrease in single premium deferred annuity sales in
2003. Financial Condition Investments The Companys investment strategies provide that portfolios are structured to
match the features of the life insurance and annuity products sold by the
Company. Annuities and life insurance policies are long-term products;
therefore, the Companys investment strategy takes a long-term perspective
emphasizing investment quality, diversification and superior investment
returns. The Companys investments are managed on a total return approach that
focuses on current income and capital appreciation. The Company continually reviews the investment portfolio to evaluate positions
that might incur other-than-temporary declines in value. For investment
holdings, general economic conditions and/or conditions specifically affecting
the underlying issuer or its industry, including downgrades by the major rating
agencies, are considered in evaluating impairment in value. In addition to
specific factors, other factors considered in the Companys review of
investment valuation are the length of time the market value is below cost and
the amount the market value is below cost. For fixed maturity and preferred stock investments, the Company individually
analyzes all positions with emphasis on those that in managements opinion, have
declined significantly below cost. The Company considers market conditions,
industry characteristics and the fundamental operating results of the issuer to
determine if declines in value are due to changes in interest rates, changes
relating to a decline in credit quality, or other issues affecting the
investment. Positions that have incurred significant market price declines for
extended periods, in which the creditworthiness of the issuer or other factors
indicate a decline that is other-than-temporary, are recognized as impaired and
reflected as a charge to the Companys operations. In 2003, impairment charges
on fixed maturity securities totaled $3.4 million. At December 31, 2003, the Companys investment in fixed maturities totaled $1.3
billion, or 93.3%, of total invested assets. These resources provide the
liquidity the Company requires to meet known and unforeseen demands on its
funds. Limited partnerships, real estate, policy loans and real estate mortgage
loans comprised the remaining 2.2% of total invested assets. The Companys performance of its fixed maturities and equity securities
compared to market indices is presented below. Two years endedDecember 31, 2003(Pre-tax annualized returns) (1)Fixed maturities
    
    
    9.63
    %Preferred stock
    
    
    13.53
    %Other indices:Lehman Brothers Global Aggregate Bond Index  Unhedged
    
    
    14.50
    %(2)Lehman
Brothers Global Aggregate Bond Index  Hedged
    
    
    5.75
    %
  (1)
    
    Includes income, realized and unrealized gains and losses.(2)
    
    Unhedged global bond index returns include the effects of currency
fluctuations. 16




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##### Table of Contents



Fixed maturities The Companys fixed maturities at December 31, 2003, consist of investments in
bonds, redeemable preferred stock and notes. It is the Companys objective that
the fixed maturity portfolio be of very high quality and well-diversified
within each market sector. The Company only purchases investment-grade
securities. Non-investment grade issues held by the Company are the result of
downgrades of securities previously rated investment grade. The portfolio is
managed with the goal of achieving reasonable returns while limiting exposure
to risk. The Companys fixed maturity investments include 97.0%, or $1.2 billion, of
high-quality, marketable bonds and redeemable preferred stock, all of which
were rated at investment-grade levels (above Ba1/BB+) at December 31, 2003. The
below-investment-grade category consists of $25.8 million of bonds rated
Ba1/BB+ and $12.1 million of bonds rated below Ba1/BB+. Generally, the
fixed-maturity securities in the Companys portfolio are rated by external
rating agencies. If not externally rated, they are rated by the Company on a
basis consistent with the basis used by the rating agencies. Management believes that having all fixed maturities classified as
available-for-sale securities will allow the Company to meet its liquidity
needs and provide greater flexibility for its investment managers to respond to
changes in market conditions or strategic direction. Securities classified as
available-for-sale are carried at market value with unrealized gains and losses
included in shareholders equity. At December 31, 2003 and 2002, net unrealized
gains on fixed maturities available-for-sale amounted to $49.9 million and
$34.6 million, respectively, net of deferred taxes. Equity securities Equity securities at December 31, 2003, consist of nonredeemable preferred
stock carried on the Statements of Financial Position at market value. At
December 31, 2003 and 2002, nonredeemable preferred stock held by the Company
had net unrealized gains of $4.1 million and $1.7 million, respectively, net of
deferred taxes. As with the fixed maturities portfolio, the Companys
nonredeemable preferred stock portfolio provides a source of highly predictable
current income. These securities are diversified within each market sector and
support the investment return provided to policyholders. The nonredeemable
preferred stock consist of $55.1 million of high quality positions rated
investment-grade level (above Ba1/BB+) at December 31, 2003. The
below-investment-grade (below Ba1/BB+) category consists of $7.9 million of
nonredeemable preferred stock investments. Reserve liabilities The Companys primary commitment is its obligation to meet the payment of
future policy benefits under the terms of its life insurance and annuity
contracts. To meet these future obligations, the Company establishes life
insurance reserves based upon the type of policy, the age of the insured and
the number of years the policy has been in force. The Company also establishes
annuity and universal life reserves based on the amount of policyholder
deposits (less applicable insurance and expense charges) plus interest earned
on those deposits. Life insurance and annuity reserves are supported primarily
by the Companys long-term, fixed income investments as the underlying policy
reserves are generally also of a long-term nature. Liquidity and Capital Resources General considerations and analysis Liquidity is a measure of the Companys ability to secure enough cash to meet
its contractual obligations and operating needs. Generally, insurance premiums
are collected prior to claims and benefit disbursements and these funds are
invested to provide necessary cash flows in future years. The Companys major
sources of cash from operations are life insurance premiums and investment
income. Major cash outflows from operations are for benefits 17




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##### Table of Contents



to policyholders and commission to agents. The net positive cash flow from
operations is used to fund Company commitments and to build the investment
portfolio, thereby increasing future investment returns. Net cash provided by
operating activities in 2003 was $11.4 million compared to $22.8 million in
2002 and $18.0 million in 2001. Cash flow sources from investing activities includes proceeds from the sales,
calls and maturities of fixed maturity positions. These proceeds totaled $340.0
million, $267.6 million and $293.0 million in 2003, 2002 and 2001,
respectively. Market interest rates declined in 2003 and 2002, causing greater
levels of calls. Also, record numbers of credit quality downgrades and defaults
occurred in the bond markets in 2002 and 2001. The Company sold many of these
issues in order to improve the overall credit quality of the fixed income
portfolio. Annuity and universal life deposits, which do not appear as revenue on the
financial statements, are a source of funds from financing activities. Net cash
provided by annuity and universal life deposits in 2003 were $128.8 million and
$14.9 million, respectively. These deposits do not involve a mortality or
morbidity risk and are accounted for using methods applicable to comparable
interest-bearing obligations of other types of financial institutions. This
method of accounting records deposits as a liability rather than as revenue. Another source of funds from financing in 2003 was the issuance of a $25.0
million surplus note to EIC, which improved the risk-based capital position of
EFL for rating agency purposes. Cash outflow requirements are primarily for policy death benefits, policy
surrenders and withdrawals, commissions, general operating expenses, federal
income taxes, dividends to shareholders and purchases of investments. Interest rate fluctuations can affect the timing of cash flows associated with
the insurance and annuity liabilities as well as the value of the assets
supporting these obligations. Changes in interest rates and other market
conditions can also expose the Company to the risk of accelerated surrenders as
policyholders and contract holders are attracted to alternative products. The
Company seeks to maintain an appropriate match between assets and liabilities
to satisfy the changing cash flow requirements associated with interest rate
fluctuations. In response to interest rate changes, the Company adjusts
credited interest rates to the extent permitted by contracts. The Company uses surrender charges to mitigate the extent, timing and
profitability impact of withdrawals of funds from annuity contracts. The
following table sets forth withdrawal characteristics of annuity reserves and
deposit liabilities: 2003
    
    2002As of December 31
    
    
    
    
    
    % of
    
    
    
    
    
    % of(dollars in thousands)
    
    Amount
    
    Total
    
    Amount
    
    TotalNot subject to discretionary withdrawal provisions
    
    $
    269,156
    
    
    
    28.9
    %
    
    $
    255,300
    
    
    
    31.8
    %Subject to discretionary withdrawal, with adjustment:With market value adjustment
    
    
    28,034
    
    
    
    3.0
    %
    
    
    25,081
    
    
    
    3.1
    %At contract value, less surrender charge of 5% or more
    
    
    224,776
    
    
    
    24.1
    %
    
    
    162,512
    
    
    
    20.2
    %Subtotal
    
    
    521,966
    
    
    
    56.0
    %
    
    
    442,893
    
    
    
    55.1
    %Subject to discretionary withdrawal at contract value
with no surrender charge or surrender charge of less
than 5%
    
    
    410,587
    
    
    
    44.0
    %
    
    
    360,782
    
    
    
    44.9
    %Total annuity reserves and deposit
liabilities
    
    $
    932,553
    
    
    
    100.0
    %
    
    $
    803,675
    
    
    
    100.0
    %
 The Companys liquidity position remains strong as invested assets and cash and
cash equivalents increased 18.2% to $1.5 billion at December 31, 2003. As an
added measure of liquidity, the Company has arranged for a $10.0 million line
of credit with a commercial bank. There were no borrowings under this credit
line in 2003, 2002 or 2001. Management believes its cash flow from operations
and its liquid assets and marketable securities will enable 18




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##### Table of Contents



the Company to meet foreseeable cash requirements. The continued adequacy of
the liquidity depends upon factors including future securities market
conditions, changes in interest rate levels and policyholder perceptions of the
Companys strength, which could lead to reduced cash inflows or increased cash
outflows. Contractual obligations (Restated) The following table presents the Companys contractual cash flow commitments on
long-term debt, limited partnerships and policyholder obligations. See Notes 11
and 14 to the Financial Statements for additional information on the long-term
debt and limited partnership obligations. Payments Due by PeriodLess than
    
    1-3
    
    3-5
    
    After(dollars in thousands)
    
    Total
    
    1 Year
    
    Years
    
    Years
    
    5 YearsFixed obligations:Limited partnership commitments
    
    $
    1,500
    
    
    $
    0
    
    
    $
    1,500
    
    
    $
    0
    
    
    $
    0Long-term debt obligations
    
    
    40,000
    
    
    
    0
    
    
    
    15,000
    
    
    
    25,000
    
    
    
    0Total fixed contractual obligations
    
    
    41,500
    
    
    
    0
    
    
    
    16,500
    
    
    
    25,000
    
    
    
    0Policyholder liabilities
    
    
    1,195,295
    
    
    
    116,181
    
    
    
    256,100
    
    
    
    251,561
    
    
    
    571,453Total contractual obligations
    
    $
    1,236,795
    
    
    $
    116,181
    
    
    $
    272,600
    
    
    $
    276,561
    
    
    $
    571,453
 Financial ratings In 2003, the Companys A.M. Best Company rating was lowered from A+ (Superior)
to A (Excellent). Life company affiliates of property and casualty groups are
typically rated one financial strength category lower than the
property and casualty affiliates by A.M. Best Company. The A rating continues to
affirm the Companys strong financial position indicating that the Company has
an excellent ability to meet its ongoing obligations to policyholders. The
Company is also rated by Standard & Poors, but this rating is based solely on
public information. Standard & Poors rates the Companys Api, strong.
Financial strength ratings continue to be an important factor in evaluating the
competitive position of insurance companies. Regulatory considerations The Commonwealth of Pennsylvania follows the statutory accounting practices
related to minimum Risk-Based Capital (RBC) requirements for domestic insurance
companies that were developed by the NAIC. The NAIC standard set for measuring
RBC is a method of calculating the minimum amount of capital appropriate for an
insurance company to support its overall business operations in consideration
of its size and risk profile. The RBC formula is used by the state insurance
regulators as an early warning tool to identify, for the purpose of initiating
regulatory action, insurance companies that potentially are inadequately
capitalized. In addition, the formula defines
minimum capital standards that will supplement the current system of low fixed
minimum capital and surplus requirements on a state-by-state basis. At December
31, 2003, the Company substantially exceeded the minimum RBC levels that require regulatory action. Factors That May Affect Future Results Agent compensation In 2003, management of the Erie Insurance Group made a commitment to focus on
property/casualty underwriting profitability. One of the changes made to
accomplish this goal was to revamp the agency compensation program, including
making several changes to the Companys commission and bonus structure.
Effective December 16, 2003, the Company implemented a reduction in the
commission paid on annuities and the restructuring of the bonus program,
including life insurance bonuses. 19




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##### Table of Contents



These bonuses, which had been in place for nearly 20 years, were designed to
incent agents to sell the Companys products when the life insurance product
portfolio was limited and less competitive with industry leaders. Today, with
the introduction of new products, the Companys portfolio is more competitive
and flexible. The Company believes the new commission structure provides
competitive levels of compensation and will recognize and reward superior life
production. While the level of paid commissions may vary in the short-term,
management does not expect the commission expense levels to vary materially
since the majority of these expenses are capitalized as deferred policy
acquisition costs. Changes in the life commission and bonus structures could
affect the growth in sales of life and annuity products by ERIE agencies. Products with interest rate guarantees Several of the Companys annuity and universal life products offer guaranteed
interest rates to policyholders. In response to the current interest rate
environment, the Company has recently reduced the credited interest rates to
historically low levels. Certain products are now at the minimum interest rates
guaranteed under these policy forms. If the interest rates on fixed income securities continue to decline, the
interest rates available in the marketplace may be insufficient to produce
target profit margins or, in extreme situations, could produce negative profit
margins on annuity and universal life deposits. Effective July 10, 2003, the Company revised its current deferred annuity
products to lower interest rate guarantees on newly issued policies to 1.5% in
all policy years. This change has been approved in all states in which the
Company operates. Annuity contracts issued between February 25, 2003 and July 9, 2003, have a
guaranteed interest rate of 3.0%. Contract forms issued before February 2003
have a stepped-down guaranteed interest rate structure. The guaranteed interest
rates and current deposit liabilities for deferred annuity products with
credited interest rates subject to change by the Company are as follows: Initial
    
    CurrentPolicy
    
    Guaranteed
    
    Guaranteed
    
    DepositYears
    
    Rate
    
    Interest Rate
    
    Liabilities(dollars in thousands)1-5
    
    
    4.5
    %
    
    
    4.5
    %
    
    $
    270,0206-10
    
    
    4.5
    
    
    
    4.0
    
    
    
    112,098Over 10
    
    
    4.5
    
    
    
    3.5
    
    
    
    159,218All Years
    
    
    3.0
    
    
    
    3.0
    
    
    
    31,102All Years
    
    
    1.5
    
    
    
    1.5
    
    
    
    9,660
 The Company has some ability in its universal life and annuity policy contracts
to restrict new deposits on existing contracts. New deposits are limited under
the terms of the Companys universal life and annuity contracts as follows:  
    
    Universal life products provide for planned premium amounts.
Additional unplanned premium payments may be made at any time during
the insureds lifetime and before the end of the payment period. The
amounts of such payments must be acceptable to the Company and be
within IRS guidelines. Policies in force at December 31, 2003, have an
annualized planned premium of $31.7 million.  
    
    Flexible premium deferred annuity (FPDA) contracts allow the Company
to limit deposits to a maximum of $25,000 per year. The Company began
limiting deposits to the contractual maximum effective July 10, 2003,
on products with interest rate guarantees exceeding 3.0%, to insure
that overall product interest spreads are maintained. Currently, there
are 23,162 FPDA contracts in force, of which 20,710 have guarantees in
excess of 3.0%. No additional payments are permitted on single premium
deferred annuity contracts. 20




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##### Table of Contents



During 2003, the average rate credited on flexible premium deferred annuity and
universal life account values was 4.33% and 4.58%, respectively. The current
coupon yield on fixed maturities matched against universal life and annuity
products at December 31, 2003, is 6.1%. Market conditions for competing products The Companys deposit-type products compete with a wide variety of investment
options. Among other factors affecting the investment decisions of
policyholders and potential policyholders are general investment market
conditions, particularly the market interest rate environment and the
performance of the equity markets. Changes in interest rates affect pricing and
the relative attractiveness of interest-sensitive investment options, which
bears directly on the ability of the Company to attract new policyholders and
retain existing holders of annuity, universal life and certain permanent life
insurance products. Financial ratings The combination of Company growth and declines in investment returns exposes
the Company to reduced statutory surplus levels. Surplus levels are an
important element of the rating process used by such agencies as A.M. Best and
Standard & Poors, which are industry-accepted measures of an insurance
companys financial health and ability to meet ongoing obligations to
policyholders. These ratings are a factor in establishing the competitive
position of insurance companies. If the Company were to incur reductions in surplus for an extended period of
time, the ratings of the Company may be downgraded. Future downgrades in these
or other ratings would reduce the competitive position of the Company by making
it more difficult to attract business in the highly competitive life insurance
industry. In such circumstances, the Company may need to take measures to
increase surplus levels in order to maintain adequate ratings. The Company may
increase surplus through a variety of means, including the issuance of
additional surplus notes. Introduction of ERIEConnection® In 2001, the Erie Insurance Group, including the Company, began the development
of several eCommerce initiatives in support of the Groups business model of
distributing insurance products exclusively through independent agents. These
initiatives include customer interaction systems that are intended to improve
service and efficiency, as well as result in increased sales. In August 2002, the eCommerce program took advantage of a significant business
opportunity to work with a well-known provider of information technology
services and solutions to develop the Erie Insurance Groups eCommerce system
called ERIEConnection®. The implementation of the new system will require a
significant investment in training and orientation for the independent agency
force. During implementation, as agency resources are dedicated to learning the
new system, new business production is expected to be curtailed over the short
term. The amount of lost production will correlate to the timing and duration
of the rollout effort as well as the number and types of issues encountered.
Precise measurement of this impact on production is not estimable. Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995:Certain forward-looking statements contained herein involve risks and
uncertainties. These statements include certain discussions relating to
underwriting, premium and investment income volume, business strategies,
profitability and business relationships and the Companys other business
activities during 2003 and beyond. In some cases, you can identify
forward-looking statements by terms such as may, will, should, could,
would, expect, plan, intend, anticipate, believe, estimate,
project, predict, potential and similar expressions. These
forward-looking statements reflect the Companys current views about future
events, are based on assumptions and are subject to known and unknown risks and
uncertainties that may cause results to differ materially from those
anticipated in those statements. Many of the factors that will determine future
events or achievements are beyond our ability to control or predict. 21




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##### Table of Contents



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to potential loss from various market risks, including
changes in interest rates, credit risk and, to a lesser extent, equity prices. Interest rate risk The Companys exposure to interest rates is concentrated in the fixed
maturities portfolio. The fixed maturities portfolio comprises 93.3% and 91.0%
of invested assets at December 31, 2003 and 2002, respectively. The Company
does not hedge its exposure to interest rate risk since it has the capacity and
intention to hold the fixed maturity positions until maturity. The Company
calculates the duration and convexity of the fixed maturities portfolio each
month to measure the price sensitivity of the portfolio to interest rate
changes. Duration measures the relative sensitivity of the fair value of an
investment to changes in interest rates. Convexity measures the rate of change
of duration with respect to changes in interest rates. These factors are
analyzed monthly to ensure that both the duration and convexity remain in the
targeted ranges established by management. Principal cash flows and related weighted-average interest rates by expected
maturity dates for financial instruments sensitive to interest rates are as
follows: December 31, 2003
    
    Principal
    
    Weighted-average(dollars in thousands)
    
    cash flows
    
    interest rateFixed maturities:2004
    
    $
    22,984
    
    
    
    5.2
    %2005
    
    
    30,200
    
    
    
    5.92006
    
    
    42,089
    
    
    
    5.22007
    
    
    57,000
    
    
    
    5.52008
    
    
    57,201
    
    
    
    5.3Thereafter
    
    
    1,001,955
    
    
    
    6.3Total
    
    $
    1,211,429Market value
    
    $
    1,280,327
 December 31, 2002
    
    Principal
    
    Weighted-average(dollars in thousands)
    
    cash flows
    
    interest rateFixed maturities:2003
    
    $
    38,890
    
    
    
    6.6
    %2004
    
    
    24,434
    
    
    
    6.72005
    
    
    50,201
    
    
    
    6.22006
    
    
    50,190
    
    
    
    6.62007
    
    
    63,932
    
    
    
    5.7Thereafter
    
    
    763,010
    
    
    
    6.9Total
    
    $
    990,657Market value
    
    $
    1,039,367
 Actual cash flows may differ from those stated as a result of calls,
prepayments and defaults. A sensitivity analysis is used to measure the potential loss in future
earnings, fair values or cash flows of market sensitive instruments resulting
from one or more selected hypothetical changes in interest rates and other
market rates or prices over a selected period. In the Companys sensitivity
analysis model, a hypothetical change in market rates is selected that is
expected to reflect reasonably possible changes in those rates. The following
pro forma information is presented assuming a 100 basis point increase in
interest rates at December 31 of each year, and 22




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##### Table of Contents



reflects the estimated effect on the fair value of the Companys fixed maturity
investment portfolio. The Company used the modified duration of its fixed
maturity investment portfolio to model the pro forma effect of a change in
interest rates at December 31, 2003 and 2002. Fixed maturity interest rate sensitivity analysis As of December 31(dollars in thousands)
    
    2003
    
    2002Market value
    
    $
    1,280,327
    
    
    $
    1,039,367Change in market value (1)
    
    
    (75,266
    )
    
    
    (58,665
    )Pro forma market value
    
    
    1,205,061
    
    
    
    980,702Modified duration (2)
    
    
    6.0
    
    
    
    5.6
  (1)
    
    The change in market value is calculated by taking the negative of the
product obtained by multiplying (i) modified duration by (ii) change in
interest rates by (iii) market value of the portfolio.  (2)
    
    Modified duration is a measure of a portfolios sensitivity to changes in
interest rates. It is interpreted as the approximate percentage change in
the market value of a portfolio for a certain basis point change in
interest rates. The risks associated with interest rate guarantees on the Companys universal
life and annuity products are discussed in the Factors That May Affect Future
Results section of this report. Credit risk The Companys portfolios of fixed maturity securities, nonredeemable preferred
stock, mortgage loans and, to a lesser extent, short-term investments are
subject to credit risk. This risk is defined as the potential loss in market
value resulting from adverse changes in the borrowers ability to repay the
debt. The Company manages this risk by performing underwriting analysis prior
to purchase and ongoing reviews of credit quality by position and for the fixed
maturity portfolio in total. The Company does not currently hedge credit risk
inherent in its fixed maturity investments. The Company has entered into various reinsurance treaties for the purpose of
ceding life insurance in force that exceeds the Companys desired retention
limits. Failure of reinsurers to honor their obligations could result in losses
to the Company. The Companys most significant reinsurance relationship is with
Generali USA Reassurance Company (Generali) (formerly Business Mens Assurance
Company of America), which reinsures a portion of the Companys life and
accident and health business. At December 31, 2003, the amount of life
insurance in force ceded to Generali totaled approximately $5.6 billion, which
represents 20.6% of EFLs total life insurance in force at that date. Equity price risk The Companys portfolio of marketable equity securities, which is carried on
the Statements of Financial Position at estimated fair value, has exposure to
price risk. Price risk is the risk of potential loss in estimated fair value
resulting from an adverse change in prices. The Companys objective is to earn
competitive relative returns by investing in a diverse portfolio of liquid
securities. The Companys equity securities at December 31, 2003 and 2002, were
made up entirely of nonredeemable preferred stocks. In 2002, the Company sold
its remaining common stock portfolio to increase its overall earnings stream
and reduce the impact of equity price risk. 23




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##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF MANAGEMENT The management of Erie Family Life Insurance Company is responsible for the
preparation of information included in this Form 10-K/A. The financial
statements have been prepared in conformity with Generally Accepted Accounting
Principles. The balances in the financial statements are developed from the
financial records of the Company and reflect estimates using judgment where
amounts cannot be measured precisely or for transactions not yet complete. The Companys system of internal control is designed to safeguard Company
assets from unauthorized use or disposition and to provide for proper
authorization, execution and recording of Company transactions. Company
personnel design, maintain and monitor internal control on an ongoing basis. The Companys report on its
evaluation of internal controls is provided in Item 9A of this Annual Report on Form 10-K/A. In
addition, the Companys internal auditors review and report on the functioning
of various aspects of internal control. The Audit Committee of the Board of Directors, composed of outside directors,
meets periodically with the Companys management, internal auditors and
independent auditors to review the work of each and to inquire as to their
assessment of the performance of Company financial personnel. The independent
auditors and internal auditors have full and free access to the Audit
Committee, without the presence of management, to discuss results of work
performed and communicate other appropriate matters. /s/
    
    Jeffrey A. LudrofJeffrey A. LudrofPresident and Chief Executive Officer/s/
    
    Philip A. GarciaPhilip A. GarciaExecutive Vice President and Chief Financial Officer/s/
    
    Timothy G. NeCastroTimothy G. NeCastroSenior Vice President and Controller
 24




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders
Erie Family Life Insurance Company
Erie, Pennsylvania We have audited the accompanying Statement of Financial Position of Erie Family
Life Insurance Company as of December 31, 2003, and the related Statements of
Operations, Shareholders Equity and Cash Flows for the year then ended. Our
audit also included the 2003 financial statement schedules listed in the Index
at Item 15(a). These financial statements and schedules are the responsibility
of the Companys management. Our responsibility is to express an opinion on
these financial statements and schedules based on our audit. We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Erie Family Life Insurance
Company at December 31, 2003, and the results of its operations and its cash
flows for the year then ended, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the information set forth
therein. /s/
    
    Ernst & Young LLP
Ernst & Young LLP
 Cleveland, Ohio
February 17, 2004, except for Note 18,          as to which the date is August 12, 2004
 25




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To The Board of Directors and Shareholders
Erie Family Life Insurance Company
Erie, Pennsylvania We have audited the Statements of Financial Position of Erie Family Life
Insurance Company (Company) as of December 31, 2002 and the related Statements
of Operations, Shareholders Equity and Cash Flows for each of the two years in
the period ended December 31, 2002. In connection with our audits of the
financial statements, we also have audited the 2002 and 2001 financial
statement schedules. These financial statements and financial statement
schedules are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits. We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements and financial statement schedules are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Erie Family Life Insurance
Company as of December 31, 2002, and the results of its operations and its cash
flows for each of the two years in the period ended December 31, 2002 in
conformity with accounting principles generally accepted in the United States
of America. Also in our opinion, the related 2002 and 2001 financial statement
schedules, when considered in relation to the basic financial statements taken
as a whole, present fairly, in all material respects, the information set forth
therein. /s/
    
    Malin, Bergquist & Company, LLP
Malin, Bergquist & Company, LLP
Erie, Pennsylvania
February 7, 2003, except for Note 18 as to which the date is August 12, 2004
 26




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ERIE FAMILY LIFE INSURANCE COMPANY STATEMENTS OF OPERATIONS Years ended December 31 (Restated)
    
    2003
    
    2002
    
    2001(dollars in thousands, except per share data)RevenuesNet policy revenue:Life premiums
    
    $
    52,045
    
    
    $
    48,070
    
    
    $
    43,693Group life and other premiums
    
    
    3,887
    
    
    
    3,059
    
    
    
    2,798Total net policy revenue
    
    
    55,932
    
    
    
    51,129
    
    
    
    46,491Net investment income
    
    
    76,966
    
    
    
    66,286
    
    
    
    61,181Net realized gains (losses) on investments
    
    
    13,176
    
    
    
    (9,610
    )
    
    
    (19,646
    )Equity in earnings of limited partnerships
    
    
    1,296
    
    
    
    3,664
    
    
    
    736Other income
    
    
    844
    
    
    
    815
    
    
    
    752Total revenues
    
    
    148,214
    
    
    
    112,284
    
    
    
    89,514Benefits and expensesDeath benefits
    
    
    15,197
    
    
    
    15,547
    
    
    
    13,338Interest on annuity deposits
    
    
    42,178
    
    
    
    39,720
    
    
    
    35,284Interest on universal life deposits
    
    
    6,959
    
    
    
    7,249
    
    
    
    6,889Surrender and other benefits
    
    
    1,263
    
    
    
    1,785
    
    
    
    2,263Increase in future life policy benefits
    
    
    7,211
    
    
    
    6,563
    
    
    
    5,748Amortization of deferred policy acquisition costs
    
    
    7,477
    
    
    
    7,287
    
    
    
    4,726Commissions
    
    
    2,679
    
    
    
    3,806
    
    
    
    2,425General expenses
    
    
    14,881
    
    
    
    10,950
    
    
    
    11,796Taxes, licenses and fees
    
    
    3,064
    
    
    
    3,156
    
    
    
    2,145Total benefits and expenses
    
    
    100,909
    
    
    
    96,063
    
    
    
    84,614Income before income taxes
    
    
    47,305
    
    
    
    16,221
    
    
    
    4,900Provision for federal income taxes
    
    
    14,818
    
    
    
    5,636
    
    
    
    1,698Net income
    
    $
    32,487
    
    
    $
    10,585
    
    
    $
    3,202Net income per share
    
    $
    3.44
    
    
    $
    1.12
    
    
    $
    0.34
 See accompanying notes to financial statements. 27




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ERIE FAMILY LIFE INSURANCE COMPANY STATEMENTS OF FINANCIAL POSITION As of December 31 (Restated)(dollars in thousands)
    
    2003
    
    2002AssetsInvested assetsFixed maturities at fair value (amortized cost of $1,203,607
and $986,137, respectively)
    
    $
    1,280,327
    
    
    $
    1,039,367Equity securities at fair value (cost of $56,608 and $66,072, respectively)
    
    
    62,948
    
    
    
    68,749Limited partnerships at fair value (cost of $12,203 and $16,352,
respectively)
    
    
    12,241
    
    
    
    16,053Real estate mortgage loans
    
    
    6,305
    
    
    
    7,175Real estate
    
    
    1,127
    
    
    
    1,210Policy loans
    
    
    9,951
    
    
    
    9,516Total invested assets
    
    
    1,372,899
    
    
    
    1,142,070Cash and cash equivalents
    
    
    91,667
    
    
    
    97,022Premiums receivable from policyholders
    
    
    7,344
    
    
    
    6,225Reinsurance recoverable
    
    
    2,960
    
    
    
    1,713Other receivables
    
    
    137
    
    
    
    1,486Accrued investment income
    
    
    15,088
    
    
    
    13,353Deferred policy acquisition costs
    
    
    98,207
    
    
    
    92,897Reserve credit for reinsurance ceded
    
    
    20,758
    
    
    
    14,123Prepaid federal income taxes
    
    
    1,983
    
    
    
    2,674Other assets
    
    
    18,520
    
    
    
    6,888Total assets
    
    $
    1,629,563
    
    
    $
    1,378,451Liabilities and shareholders equityLiabilitiesPolicy liabilities and accruals:Future policy benefits
    
    $
    108,089
    
    
    $
    94,243Policy and contract claims
    
    
    3,653
    
    
    
    2,362Annuity deposits
    
    
    932,553
    
    
    
    803,675Universal life deposits
    
    
    150,421
    
    
    
    135,551Supplementary contracts not including life contingencies
    
    
    579
    
    
    
    625Other policyholder funds
    
    
    9,856
    
    
    
    14,335Deferred income taxes
    
    
    46,813
    
    
    
    37,668Reinsurance premium due
    
    
    1,875
    
    
    
    1,591Securities lending collateral
    
    
    65,495
    
    
    
    41,669Accounts payable and accrued expenses
    
    
    9,239
    
    
    
    9,673Notes payable to Erie Indemnity Company
    
    
    40,000
    
    
    
    15,000Due to affiliates
    
    
    3,442
    
    
    
    2,886Dividends payable
    
    
    1,985
    
    
    
    1,985Total liabilities
    
    
    1,374,000
    
    
    
    1,161,263Shareholders equityCommon stock, $.40 par value per share; authorized 15,000,000 shares;
9,450,000 shares issued and outstanding
    
    
    3,780
    
    
    
    3,780Additional paid-in capital
    
    
    630
    
    
    
    630Accumulated other comprehensive income
    
    
    44,603
    
    
    
    30,777Retained earnings
    
    
    206,550
    
    
    
    182,001Total shareholders equity
    
    
    255,563
    
    
    
    217,188Total liabilities and shareholders equity
    
    $
    1,629,563
    
    
    $
    1,378,451
 See accompanying notes to financial statements. 28




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##### Table of Contents



ERIE FAMILY LIFE INSURANCE COMPANY STATEMENTS OF CASH FLOWS Years ended December 31 (dollars in thousands)
    
    2003
    
    2002
    
    2001Cash flows from operating activitiesPremiums collected
    
    $
    51,942
    
    
    $
    55,077
    
    
    $
    50,258Net investment income received
    
    
    78,295
    
    
    
    68,096
    
    
    
    64,439Miscellaneous income
    
    
    844
    
    
    
    814
    
    
    
    751Benefits to policyholders
    
    
    (65,485
    )
    
    
    (63,548
    )
    
    
    (59,611
    )Commissions paid to agents
    
    
    (14,300
    )
    
    
    (12,398
    )
    
    
    (8,002
    )Salaries and wages paid
    
    
    (11,408
    )
    
    
    (11,485
    )
    
    
    (9,127
    )General operating expenses paid
    
    
    (13,115
    )
    
    
    (11,782
    )
    
    
    (9,101
    )Taxes, licenses and fees paid
    
    
    (2,934
    )
    
    
    (3,300
    )
    
    
    (1,909
    )Income taxes (paid) recovered
    
    
    (12,426
    )
    
    
    1,329
    
    
    
    (9,701
    )Net cash provided by operating activities
    
    
    11,413
    
    
    
    22,803
    
    
    
    17,997Cash flows from investing activitiesPurchase of investments:Fixed maturities
    
    
    (554,355
    )
    
    
    (551,582
    )
    
    
    (329,244
    )Equity securities
    
    
    (13,675
    )
    
    
    (31,246
    )
    
    
    (23,172
    )Limited partnerships
    
    
    (2,560
    )
    
    
    (6,199
    )
    
    
    (9,513
    )Sales/maturities of investments:Sales of fixed maturities
    
    
    228,277
    
    
    
    152,474
    
    
    
    218,548Calls/maturities of fixed maturities
    
    
    111,713
    
    
    
    115,099
    
    
    
    74,480Equity securities
    
    
    20,841
    
    
    
    59,963
    
    
    
    55,563Limited partnerships
    
    
    7,965
    
    
    
    10,952
    
    
    
    28,206Increase (decrease) in collateral from securities lending
    
    
    23,826
    
    
    
    (7,290
    )
    
    
    48,959Net mortgage loans
    
    
    871
    
    
    
    182
    
    
    
    927Net policy loans
    
    
    (435
    )
    
    
    (637
    )
    
    
    (1,113
    )Net cash (used in) provided by investing activities
    
    
    (177,532
    )
    
    
    (258,284
    )
    
    
    63,641Cash flows from financing activitiesAnnuity and supplementary contract deposits and interest
    
    
    186,379
    
    
    
    215,255
    
    
    
    105,138Annuity and supplementary contract surrenders and withdrawals
    
    
    (57,547
    )
    
    
    (48,410
    )
    
    
    (52,408
    )Universal life deposits and interest
    
    
    20,285
    
    
    
    19,426
    
    
    
    19,127Universal life surrenders
    
    
    (5,415
    )
    
    
    (5,434
    )
    
    
    (4,759
    )Proceeds from issuance of long-term debt
    
    
    25,000
    
    
    
    0
    
    
    
    0Dividends paid to shareholders
    
    
    (7,938
    )
    
    
    (7,796
    )
    
    
    (7,229
    )Net cash provided by financing activities
    
    
    160,764
    
    
    
    173,041
    
    
    
    59,869Net (decrease) increase in cash and cash equivalents
    
    
    (5,355
    )
    
    
    (62,440
    )
    
    
    141,507Cash and cash equivalents at beginning of year
    
    
    97,022
    
    
    
    159,462
    
    
    
    17,955Cash and cash equivalents at end of year
    
    $
    91,667
    
    
    $
    97,022
    
    
    $
    159,462
 See accompanying notes to financial statements. 29




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##### Table of Contents



ERIE FAMILY LIFE INSURANCE COMPANY STATEMENTS OF SHAREHOLDERS EQUITY (Restated)
    
    
    
    
    
    
    
    
    
    
    
    
    
    AccumulatedTotal
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    AdditionalShareholders
    
    Comprehensive
    
    Retained
    
    Comprehensive
    
    Common
    
    Paid-in(dollars in thousands,except per
share data)
    
    Equity
    
    Income
    
    Earnings
    
    Income
    
    Stock
    
    CapitalBalance, January 1, 2001
    
    $
    192,796
    
    
    
    
    
    
    $
    183,523
    
    
    $
    4,863
    
    
    $
    3,780
    
    
    $
    630Comprehensive income:Net income
    
    
    3,202
    
    
    $
    3,202
    
    
    
    3,202Unrealized appreciation
of investments, net of tax
    
    
    12,195
    
    
    
    12,195
    
    
    
    
    
    
    
    12,195Comprehensive income
    
    
    
    
    
    $
    15,397Dividends declared,
$0.78 per share
    
    
    (7,371
    )
    
    
    
    
    
    
    (7,371
    )Balance, December 31, 2001
    
    
    200,822
    
    
    
    
    
    
    
    179,354
    
    
    
    17,058
    
    
    
    3,780
    
    
    
    630Comprehensive income:Net income
    
    
    10,585
    
    
    $
    10,585
    
    
    
    10,585Unrealized appreciation
of investments, net of tax
    
    
    13,719
    
    
    
    13,719
    
    
    
    
    
    
    
    13,719Comprehensive income
    
    
    
    
    
    $
    24,304Dividends declared,
$0.84 per share
    
    
    (7,938
    )
    
    
    
    
    
    
    (7,938
    )Balance, December 31, 2002
    
    
    217,188
    
    
    
    
    
    
    
    182,001
    
    
    
    30,777
    
    
    
    3,780
    
    
    
    630Comprehensive income:Net income
    
    
    32,487
    
    
    $
    32,487
    
    
    
    32,487Unrealized appreciation
of investments, net of tax
    
    
    13,826
    
    
    
    13,826
    
    
    
    
    
    
    
    13,826Comprehensive income
    
    
    
    
    
    $
    46,313Dividends declared,
$0.84 per share
    
    
    (7,938
    )
    
    
    
    
    
    
    (7,938
    )Balance, December 31, 2003
    
    $
    255,563
    
    
    
    
    
    
    $
    206,550
    
    
    $
    44,603
    
    
    $
    3,780
    
    
    $
    630
 See accompanying notes to financial statements. 30




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ERIE FAMILY LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS
(All dollar amounts are in thousands, except per share data) NOTE 1. NATURE OF BUSINESS Erie Family Life Insurance Company (the Company), a Pennsylvania-domiciled life
insurer, is engaged in the business of underwriting and selling
nonparticipating individual and group life insurance policies, including
universal life, annuity products and disability income products. The Company
markets its products through independent agents in 10 states and the District
of Columbia and is subject to supervision and regulations of the states in
which it operates. A majority of the Companys business is written in
Pennsylvania, Ohio, Maryland and Virginia. See also Note 15. The Company is owned 21.6% by the Erie Indemnity Company (EIC), 53.5% by the
Erie Insurance Exchange (Exchange) and the remaining 24.9% by public
shareholders. EIC is a Pennsylvania business corporation formed in 1925 to be
the attorney-in-fact for policyholders of Erie Insurance Exchange, a
Pennsylvania-domiciled reciprocal insurance exchange. As attorney-in-fact for
the Exchange, EIC has a fiduciary duty to protect the policyholders of the
Exchange in addition to its fiduciary duty to protect the interests of its
shareholders. EIC operates predominantly as a provider of certain management
services to the Exchange. EIC also is engaged in the property/casualty
insurance business through its wholly-owned subsidiaries, Erie Insurance
Company, Erie Insurance Property and Casualty Company, and Erie Insurance
Company of New York and through a subsidiary of the Exchange, Flagship City
Insurance Company. The Company, EIC, the Exchange and their subsidiaries and
affiliates operate collectively under the name Erie Insurance Group. NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS In June 2002, the Financial Accounting Standards Board (FASB), issued Statement
of Financial Accounting Standards (FAS) 146, Accounting for Costs Associated
with Exit or Disposal Activities, which supercedes Emerging Issues Task Force
(EITF) Issue 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred
in a Restructuring). The provisions of this Statement are effective for exit
and disposal activities initiated after December 31, 2002. FAS 146 requires
recognition of a liability for costs associated with an exit or disposal
activity when the liability is incurred, rather than when the entity commits to
an exit plan under EITF Issue 94-3. The Company has not exited or disposed of
any portion of its business. In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, which became effective for
financial statements of interim or annual periods ending after December 15,
2002. This Interpretation provides guidance on disclosures to be made by a
guarantor about its obligations under certain guarantees and clarifies that a
guarantor is required to recognize a liability for the fair value of the
obligation undertaken in issuing the guarantee. The Company has no guarantee
contracts that are covered by this Interpretation. The Financial Accounting Standard Board (FASB) issued FASB Interpretation No.
46 (FIN 46), Consolidation of Variable Interest Entities, in January 2003 and
made certain revisions to FIN 46 in December 2003. This Interpretation provides
guidance on the identification of entities for which control is achieved
through means other than through voting rights, so called variable interest
entities (VIEs), and how to determine when and which business enterprises
should consolidate variable interest entities. If an entity is identified as
the variable interest entitys primary beneficiary, the entity is required to
consolidate the variable interest entity. For public entities that are not
small business issuers, FIN 46 is effective no later than the first reporting
period that ends after March 15, 2004. 31




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Management has evaluated its limited partnership investments comprised of four
real estate partnerships valued at $11,250 and one mezzanine debt partnership
valued at $991 to determine if they are VIEs. All but one of the partnerships
qualify as VIEs. However, the Company does not qualify as the primary
beneficiary for any of the partnerships. The Company does not hold a
significant interest in any of the limited partnerships; therefore,
consolidation of the partnerships with the financial statements of the Company
is not required. In July 2003, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 03-1, Accounting and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate
Accounts. This SOP is not applicable to the Company since the Company does not
issue the products addressed in the SOP. NOTE 3. SIGNIFICANT ACCOUNTING POLICIES Basis of presentation The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles (GAAP) that differ from statutory
accounting practices (SAP) prescribed or permitted for insurance companies by
state regulatory authorities. For differences between GAAP and SAP, see Note
16. Use of estimates The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The
most significant estimates relate to valuation of investments, policy
acquisition costs and reserves for policy liabilities. While management
believes its estimates are appropriate, the ultimate amounts may differ from
the estimates provided. The methods for making these estimates are continually
reviewed and any adjustments considered necessary are reflected in current
earnings. Investments Fixed maturities and marketable equity securities are classified as
available-for-sale. At December 31, 2003, equity securities consist of
nonredeemable preferred stock while fixed maturities consist of bonds, notes
and redeemable preferred stock. Available-for-sale securities are stated at
fair value, with the unrealized gains and losses, net of tax, reported as a
separate component of Comprehensive Income and Shareholders Equity. There are
no securities classified as trading securities or held-to-maturity
securities. Limited partnerships include U.S. and foreign real estate and fixed income
investments. These partnerships are recorded using the equity method, which
approximates the Companys share of the carrying value of the partnership. The
Company has not guaranteed any of the partnership liabilities. Mortgage loans on commercial real estate are recorded at unpaid balances,
adjusted for amortization of premium or discount. Valuation allowances, if
needed, are provided for impairment in net realizable value based on periodic
valuations. Policy loans are recorded at unpaid balances. Interest and dividend income is recorded as earned. Realized gains and losses
on sales of investments are recognized in income on the specific identification
method. The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization is included
in investment income. 32




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For the mortgage-backed bond portion of the fixed maturity securities
portfolio, the Company recognizes income using a constant effective yield
method based on anticipated prepayments and the estimated economic life of the
securities. When actual prepayments differ significantly from anticipated
prepayments, the effective yield is recalculated to reflect actual payment to
date and anticipated future payments. The net investment in the security is
adjusted to the amount that would have existed had the new effective yield been
applied since the acquisition of the security, with the corresponding
adjustment included as part of investment income. The Company continually reviews the investment portfolio to evaluate positions
that might incur other-than-temporary declines in value. For investment
holdings, general economic conditions and/or conditions specifically affecting
the underlying issuer or its industry, including downgrades by the major rating
agencies, are considered in evaluating impairment in value. In addition to
specific factors, other factors considered in the Companys review of
investment valuation are the length of time the market value is below cost and
the amount the market value is below cost. For fixed maturity and preferred stock investments, the Company individually
analyzes all positions with greater emphasis on those that have in
managements
opinion, declined significantly below cost. The Company considers market
conditions, industry characteristics and the fundamental operating results of
the issuer to determine if declines in value are due to changes in interest
rates, changes relating to a decline in credit quality, or other issues
affecting the investment. Positions that have incurred significant market price
declines for extended periods, where the creditworthiness of the issuer or
other factors indicate a decline that is other-than-temporary, are recognized
as impaired, and reflected as a charge to the Companys operations. Impairment charges made on securities are considered a realized loss in the
Statements of Operations. Impairment charges on limited partnerships are
recorded as a loss in Equity in Earnings of Limited Partnerships in the
Statements of Operations. Cash equivalents The Company considers all highly liquid investments with an original maturity
of three months or less when purchased to be cash equivalents. Cash equivalents
total $31,036 and $58,190 at December 31, 2003 and 2002, respectively, and are
comprised of investments in bank money market funds and short-term bonds. Deferred policy acquisition costs (DAC) asset The Company incurs significant costs in connection with acquiring new business.
Many of these acquisition costs, which vary with and are primarily related to
the production of new business, are deferred as an asset. At each balance sheet
date, the Company evaluates the historical and expected future gross premiums
and profits on its insurance and annuity products. The DAC on traditional life insurance products are amortized in relation to
gross premiums. Assumptions used for a specific year are locked-in; therefore, amortization
in subsequent years is not adjusted for changing assumptions. Changes in estimated expected future gross profit on the annuity and universal
life products requires that the DAC amortization rate be revised retroactively
to the date of policy issuance. The cumulative difference related to prior
periods is recognized as a component of the current periods DAC amortization,
along with DAC amortization associated with the actual gross profits of the
current period. Lower actual gross profits in a period would typically result
in less DAC amortization expense in that period. The converse would also be
true. However, if lower gross profits were to continue into the future,
additional amortization of the existing DAC asset may occur. The Company periodically reviews the DAC asset to determine if it continues to
be recoverable from future income. If less than the full amount of DAC is
determined to be recoverable, a portion of such costs are expensed at the time 33




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##### Table of Contents



of determination. The amount of DAC considered realizable would be reduced in
the near term if the estimate of ultimate or future gross premiums or profits
is reduced. The amount of DAC amortization would be revised if any of the
estimates discussed above are revised. The DAC is adjusted for the impact of unrealized gains or losses on investments
as if these gains or losses had been realized, with corresponding credits or
charges included in Accumulated Other Comprehensive Income (Loss). Insurance liabilities Liabilities for life insurance and income-paying annuity future policy benefits
are computed primarily by the net level premium method with assumptions as to
anticipated mortality, withdrawals, lapses and investment yields. Disability
income reserves are calculated as two-year preliminary term mid-terminal
reserves plus unearned premium reserves plus claim reserves. Deferred annuity
future policy benefit liabilities are established at accumulated values without
reduction for surrender charges. Reserves for universal life and investment
contracts are based on the contract account balance, if future benefit payments
in excess of the account balance are not guaranteed, or the present value of
future benefit payments when such payments are guaranteed. Variations are
inherent in such calculations due to the estimates and assumptions necessary in
the calculations. Interest rate assumptions for noninterest-sensitive life
insurance range from 3.50% to 4.00% on policies issued in 1980 and prior years
and 5.00% to 7.25% on policies issued in 1981 and subsequent years. Mortality
and withdrawal assumptions are based on tables typically used in the industry,
modified to reflect actual experience where appropriate. Universal life and annuity deposits are credited with varying interest rates
determined at the discretion of the Company subject to certain minimums.
Interest rates credited on deposits during the year were as follows: 2003

    
    2002
    
    2001Annuity
    
    
    3.00% - 4.80
    %
    
    
    4.00% - 6.00
    %
    
    
    5.00% - 6.25
    %Universal Life
    
    
    4.25% - 6.00
    %
    
    
    5.25% - 6.75
    %
    
    
    6.00% - 6.75
    %
 Liability for guaranty fund assessments The Company may be required, under the solvency or guaranty laws of the various
states in which it is licensed, to pay assessments up to prescribed limits to fund
policyholder losses or liabilities of insolvent life insurance companies.
Certain states permit these assessments, or a portion thereof, to be recovered
as an offset to future premium taxes. Assessments are recognized as incurred when an event obligating the Company has
occurred and the amount can be reasonably estimated. The Company commonly
becomes aware of insolvencies prior to obtaining specific assessment amounts
from state guaranty associations to estimate its share of the liability. The
Company estimates its liability based on information received from the National
Organization of Life and Health Insurance Guaranty Associations (NOLHGA). The
information provided by NOLHGA is obtained from a variety of sources and is
only an estimate. When the assessment is subject to credit against future
premium taxes, and such credits are likely to be recoverable, an asset is
established. The asset is reduced when the credits are realized under
applicable state law. The Companys estimated liability for guaranty fund and other assessments was
$729 and $645 at December 31, 2003 and 2002, respectively. The estimated asset
for credit against future premium taxes was $512 and $506 at December 31, 2003
and 2002, respectively. 34




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##### Table of Contents



Recognition of premium revenues and losses Premiums on traditional life insurance contracts are reported as earned revenue
when due. Reserves for future policy benefits are established as premiums are
earned. For universal life and annuity contracts, deposits are recorded as a
liability. Revenue is recognized as amounts are assessed against the
policyholders account for mortality coverage and contract expenses. The
primary source of revenue on annuity deposits is derived from the interest
spread earned by the Company which is reflected in net investment income and
interest on annuity deposits. Disability income premiums are recognized as
revenue pro rata over the terms of the contracts. Reinsurance Reinsurance premiums, commissions and expense reimbursements on reinsurance
ceded are accounted for on a basis consistent with those used in accounting for
the original policies issued. Premiums and benefits to policyholders ceded to
other companies have been reported as a reduction of Policy Revenue and
Increase in Future Policy Benefits on the Statements of Operations. Expense reimbursements received in connection with reinsurance ceded have been
accounted for as a reduction of the related policy acquisition costs. Amounts
recoverable from reinsurers for future policy benefits are estimated in a
manner consistent with the assumptions used for the underlying policy benefits
and are recorded as an asset under Reserve Credit for Reinsurance Ceded on
the Statements of Financial Position. Income taxes Provisions for income taxes include deferred taxes resulting from changes in
cumulative temporary differences between the tax bases and financial statement
bases of assets and liabilities. Deferred taxes are provided on a liability
method whereby deferred tax assets are recognized for deductible temporary
differences and deferred tax liabilities are recognized for taxable temporary
differences. Deferred tax assets and liabilities are adjusted for the effects
of changes in tax laws and rates on the date of enactment. Software development costs Software development costs have been capitalized and included in other assets.
Total software development costs are being amortized on a straight-line basis
over the expected useful life of the asset. The carrying value of this asset at
December 31, 2003 and 2002, was $1,434 and $1,684, respectively. Earnings per share Earnings per share amounts are based on the weighted average number of common
shares outstanding during each of the respective years. Reclassifications Certain amounts previously reported in the 2002 financial statements have been
reclassified to conform to the current periods presentation. Such
reclassifications did not impact earnings or total shareholders equity. 35




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NOTE 4. INVESTMENTS The following tables summarize the cost and market value of available-for-sale
securities at December 31, 2003 and 2002: Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    EstimatedCost
    
    Gains
    
    Losses
    
    Fair ValueDecember 31, 2003Fixed maturitiesBonds:U. S. treasuries and government agencies
    
    $
    61,176
    
    
    $
    1,543
    
    
    $
    37
    
    
    $
    62,682Public utilities
    
    
    141,154
    
    
    
    10,377
    
    
    
    528
    
    
    
    151,003U. S. banks, trusts and insurance companies
    
    
    158,731
    
    
    
    9,358
    
    
    
    836
    
    
    
    167,253U. S. industrial and miscellaneous
    
    
    547,363
    
    
    
    41,077
    
    
    
    776
    
    
    
    587,664Mortgage-backed
    
    
    145,394
    
    
    
    3,622
    
    
    
    182
    
    
    
    148,834Asset-backed
    
    
    5,032
    
    
    
    330
    
    
    
    0
    
    
    
    5,362Foreign
    
    
    137,741
    
    
    
    13,314
    
    
    
    933
    
    
    
    150,122Total bonds
    
    
    1,196,591
    
    
    
    79,621
    
    
    
    3,292
    
    
    
    1,272,920Redeemable preferred stock
    
    
    7,016
    
    
    
    391
    
    
    
    0
    
    
    
    7,407Total fixed maturities
    
    
    1,203,607
    
    
    
    80,012
    
    
    
    3,292
    
    
    
    1,280,327Equity securitiesNonredeemable preferred stock:Public utilities
    
    
    1,864
    
    
    
    136
    
    
    
    0
    
    
    
    2,000U.S. banks, trusts and insurance companies
    
    
    13,909
    
    
    
    1,921
    
    
    
    0
    
    
    
    15,830U. S. industrial and miscellaneous
    
    
    17,119
    
    
    
    1,775
    
    
    
    20
    
    
    
    18,874Foreign
    
    
    23,716
    
    
    
    2,528
    
    
    
    0
    
    
    
    26,244Total equity securities
    
    
    56,608
    
    
    
    6,360
    
    
    
    20
    
    
    
    62,948Total fixed maturities and equity securities
    
    $
    1,260,215
    
    
    $
    86,372
    
    
    $
    3,312
    
    
    $
    1,343,275December 31, 2002Fixed maturitiesBonds:U. S. treasuries and government agencies
    
    $
    48,234
    
    
    $
    2,604
    
    
    $
    0
    
    
    $
    50,838Public utilities
    
    
    120,871
    
    
    
    6,121
    
    
    
    1,491
    
    
    
    125,501U. S. banks, trusts and insurance companies
    
    
    101,022
    
    
    
    7,591
    
    
    
    114
    
    
    
    108,499U. S. industrial and miscellaneous
    
    
    491,719
    
    
    
    31,497
    
    
    
    4,749
    
    
    
    518,467Mortgage-backed
    
    
    75,217
    
    
    
    3,605
    
    
    
    0
    
    
    
    78,822Asset-backed
    
    
    4,500
    
    
    
    495
    
    
    
    0
    
    
    
    4,995Foreign
    
    
    135,743
    
    
    
    9,640
    
    
    
    2,273
    
    
    
    143,110Total bonds
    
    
    977,306
    
    
    
    61,553
    
    
    
    8,627
    
    
    
    1,030,232Redeemable preferred stock
    
    
    8,831
    
    
    
    304
    
    
    
    0
    
    
    
    9,135Total fixed maturities
    
    
    986,137
    
    
    
    61,857
    
    
    
    8,627
    
    
    
    1,039,367Equity securitiesNonredeemable preferred stock:U. S. banks, trusts and insurance companies
    
    
    7,016
    
    
    
    211
    
    
    
    0
    
    
    
    7,227U. S. industrial and miscellaneous
    
    
    11,872
    
    
    
    773
    
    
    
    0
    
    
    
    12,645Foreign
    
    
    47,184
    
    
    
    2,496
    
    
    
    803
    
    
    
    48,877Total equity securities
    
    
    66,072
    
    
    
    3,480
    
    
    
    803
    
    
    
    68,749Total fixed maturities and equity securities
    
    $
    1,052,209
    
    
    $
    65,337
    
    
    $
    9,430
    
    
    $
    1,108,116
 36




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##### Table of Contents



Components of net investment income follow for the years ended December 31: 2003
    
    2002
    
    2001Fixed maturities
    
    $
    72,139
    
    
    $
    58,933
    
    
    $
    53,172Equity securities
    
    
    5,323
    
    
    
    5,999
    
    
    
    6,815Other
    
    
    2,051
    
    
    
    3,296
    
    
    
    3,109Total investment income
    
    
    79,513
    
    
    
    68,228
    
    
    
    63,096Investment expense
    
    
    2,547
    
    
    
    1,942
    
    
    
    1,915Net investment income
    
    $
    76,966
    
    
    $
    66,286
    
    
    $
    61,181
 Components of realized gains and losses on investments reflected in operations
for the years ended December 31 are included below. Included in 2003 gross
realized losses of fixed maturities are impairment charges totaling $3,445.
These charges relate primarily to investments in the communications, energy and
finance segments. Included in 2002 gross realized losses of fixed maturities
and equity securities are impairment charges totaling $25,806. These charges
relate primarily to investments in the communications, energy and finance
segments. In 2001, an equity securities impairment charge totaling $27 related
to one position in the computer and office equipment segment. 2003
    
    2002
    
    2001Fixed maturities:Gross realized gains
    

    $
    19,411
    
    
    $
    10,008
    
    
    $
    8,616Gross realized losses
    
    
    (6,081
    )
    
    
    (26,400
    )
    
    
    (13,502
    )Net realized gains (losses)
    
    
    13,330
    
    
    
    (16,392
    )
    
    
    (4,886
    )Equity securities:Gross realized gains
    
    
    379
    
    
    
    13,308
    
    
    
    1,657Gross realized losses
    
    
    (533
    )
    
    
    (5,276
    )
    
    
    (17,561
    )Net realized (losses) gains
    
    
    (154
    )
    
    
    8,032
    
    
    
    (15,904
    )Limited partnerships:Gross realized gains
    
    
    0
    
    
    
    452
    
    
    
    4,715Gross realized losses
    
    
    0
    
    
    
    (1,702
    )
    
    
    (3,571
    )Net realized (losses) gains
    
    
    0
    
    
    
    (1,250
    )
    
    
    1,144Net realized gains (losses) on investments
    
    $
    13,176
    
    
    
    ($9,610
    )
    
    
    ($19,646
    )
 Investments at carrying value in limited partnerships consisted of the
following at December 31: 2003
    
    2002Real estate
    
    $
    11,250
    
    
    $
    13,551Mezzanine debt
    
    
    991
    
    
    
    2,502Total limited partnerships
    
    $
    12,241
    
    
    $
    16,053
 The components of equity in earnings of limited partnerships reported for the
years ended December 31, 2003, 2002 and 2001 are reflected below. Impairment charges of $2,026 and
$953 in 2003 and 2002, respectively, are included in Equity in Earnings of
Limited Partnerships in the Statements of Operations. 2003
    
    2002
    
    2001Private equity
    
    $
    0
    
    
    $
    0
    
    
    
    ($1,093
    )Real estate
    
    
    2,790
    
    
    
    4,136
    
    
    
    1,390Mezzanine debt
    
    
    (1,494
    )
    
    
    (472
    )
    
    
    439Equity in earnings of limited partnerships
    
    $
    1,296
    
    
    $
    3,664
    
    
    $
    736
 37




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##### Table of Contents



The following is a summary of fixed maturities by remaining term to contractual
maturity. Mortgage-backed securities are allocated based on their stated
maturity dates. Actual cash flows may differ from those stated as a result of
calls, prepayments or defaults. Amortized
    
    EstimatedAs of December 31, 2003
    
    Cost
    
    Fair ValueDue in one year or less
    
    $
    17,678
    
    
    $
    19,432Due after one year through five years
    
    
    184,637
    
    
    
    196,157Due after five years through 10 years
    
    
    567,715
    
    
    
    605,695Due after 10 years through 20 years
    
    
    207,239
    
    
    
    215,483Due after 20 years
    
    
    225,328
    
    
    
    242,220Bonds in default
    
    
    1,010
    
    
    
    1,340Total fixed maturities
    
    $
    1,203,607
    
    
    $
    1,280,327
 The gross unrealized losses at December 31, 2003, span the various investment
categories of fixed maturities and equity securities. The gross unrealized
losses are aged as follows: Unrealized
    
    Amortized
    
    Estimated
    
    Number ofLoss
    
    Cost
    
    Fair Value
    
    HoldingsSix months or less
    
    
    ($3,204
    )
    
    $
    174,749
    
    
    $
    171,545
    
    
    
    64Six to 12 months
    
    
    (59
    )
    
    
    3,441
    
    
    
    3,382
    
    
    
    112 to 18 months
    
    
    (28
    )
    
    
    2,058
    
    
    
    2,030
    
    
    
    1Greater than 18 months
    
    
    (21
    )
    
    
    3,178
    
    
    
    3,157
    
    
    
    2($3,312
    )
    
    $
    183,426
    
    
    $
    180,114
    
    
    
    68
 No investments in an
unrealized loss position at December 31, 2003, had a
decline in market value that was considered by management to be
other-than-temporary, thereby causing the investment to be impaired based on
Company policy. There were no market conditions, industry characteristics or
fundamental operating results of a specific issuer that suggested impairment of
any of the listed investments. Net unrealized gains and losses on investments are credited or charged directly
to Accumulated Other Comprehensive Income. At December 31, 2003, net
unrealized gains on investments of $44,603 consisted of $86,410 in gross
unrealized gains, less $3,312 in gross unrealized losses, less $14,478 in other
related offsets (see Note 5) and deferred taxes of $24,017. Changes in net unrealized gains include the following for the years ended
December 31: (Restated)
    
    2003
    
    2002
    
    2001Unrealized gains (losses) from:Equity securities
    
    $
    3,663
    
    
    
    ($14,240
    )
    
    $
    6,388Fixed maturities
    
    
    23,490
    
    
    
    41,460
    
    
    
    23,197Limited partnerships
    
    
    338
    
    
    
    143
    
    
    
    (7,013
    )Deferred policy acquisition costs
    
    
    (6,219
    )
    
    
    (6,256
    )
    
    
    (3,812
    )Deferred federal income tax
    
    
    (7,446
    )
    
    
    (7,388
    )
    
    
    (6,565
    )Increase in net unrealized gains
    
    $
    13,826
    
    
    $
    13,719
    
    
    $
    12,195
 The Company participates in a securities lending program whereby certain
securities from its portfolio are loaned to other institutions for short
periods of time. A fee is paid to the Company by the borrower in return.
Company policy requires collateral equal to 102% of the fair value of the
loaned securities. The Company maintains full ownership 38




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##### Table of Contents



rights to the
securities loaned and continues to earn interest on them. In addition, the
Company has the ability to sell the securities while they are on loan. The
Company has an indemnification agreement with the lending agent in the event a
borrower becomes insolvent or fails to return securities. Securities lending
collateral is recorded by the Company as a liability. The proceeds from the
collateral are invested in cash and short-term investments and are reported on
the Statements of Financial Position as cash and cash equivalents. The Company
shares a portion of the interest received on these short-term investments with
the lending agent. Revenue received for the years ended December 31, 2003 and
2002, related to this program, totaled $103 and $97, respectively. The Company had loaned securities with a market value of $64,082 and $40,732
and secured collateral of $65,495 and $41,669 at December 31, 2003 and 2002,
respectively. The Company records the loaned securities on its Statements of
Financial Position as part of its invested assets. The Company has incurred no
losses on the loan program since the programs inception. Bonds having a fair value of $2,215 at December 31, 2003, were on deposit with
various regulatory authorities as required by law. Bonds having a fair value of
$15,057 are pledged as collateral on a $10,000 line of credit with a bank.
There were no borrowings on the line during 2003 and 2002. See Note 6 for fair value basis of investments. NOTE 5. DEFERRED POLICY ACQUISITION COSTS Deferred policy acquisition costs are summarized as follows: (Restated)
    
    2003
    
    2002
    
    2001Balance at beginning of year
    
    $
    92,897
    
    
    $
    84,419
    
    
    $
    80,225Additions:Commissions
    
    
    9,448
    
    
    
    10,894
    
    
    
    5,543General expenses
    
    
    9,503
    
    
    
    10,909
    
    
    
    6,986Taxes, licenses and fees
    
    
    55
    
    
    
    218
    
    
    
    20319,006
    
    
    
    22,021
    
    
    
    12,732Amortization
    
    
    (7,477
    )
    
    
    (7,287
    )
    
    
    (4,726
    )Change in unrealized
investment gains
    
    
    (6,219
    )
    
    
    (6,256
    )
    
    
    (3,812
    )Balance at end of year
    
    $
    98,207
    
    
    $
    92,897
    
    
    $
    84,419
 The 2003 and 2002 annuity deposits were significantly higher than 2001,
resulting in an increase in commission amounts capitalized in DAC. Additions to
DAC relating to annuities were $4,432, $6,932 and $1,880 in 2003, 2002 and
2001, respectively. NOTE 6. FAIR VALUE OF FINANCIAL INSTRUMENTS Estimated fair value amounts of financial instruments have been determined
using available market information and appropriate valuation methodologies.
However, considerable judgment is required in developing the estimates of fair
value. Accordingly, these estimates are not necessarily indicative of the
amounts that could be realized in a current market exchange. Certain financial
instruments, including insurance contracts other than financial guarantees and
investment contracts, are exempt from fair value disclosure requirements. The
following methods and assumptions were used by the Company in estimating the
fair value of each class of financial instrument for which it is practicable to
estimate that value. 39




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##### Table of Contents



Cash and cash equivalents:The carrying amounts approximate their fair value. Fixed maturities and equity securities:Fair values were based on quoted market
prices, where available, or dealer quotations. See Note 4 for fair value
disclosures. Limited partnerships:Fair values of the mezzanine debt limited partnerships
were provided to the Company by the partnership. Real estate limited
partnership fair values approximate carrying value. Policy loans and real estate mortgage loans:For policy loans and real estate
mortgage loans, carrying value is representative of estimated fair value. Trading assets and trading liabilities:The carrying value of these assets and
liabilities arising in the ordinary course of business approximates their fair
values. Annuity deposits:Included in this category are annuity deposit contracts. The
Company retains the right to change interest rates subject to a one-year
guaranteed interest rate and a minimum interest rate provided in the policy. As
a result, the carrying value of these contracts approximates their fair value.
These annuity deposits totaled $759,337 and $643,941 at December 31, 2003 and
2002, respectively. Annuity deposits include structured settlements, contracts that the
policyholder cannot surrender at any time and for which the policyholder is
locked into an interest rate for the duration of the contract. Fair values of
these contracts were estimated using discounted projected cash flows based upon
interest rates currently being offered for similar contracts with the same
remaining maturities. At December 31, 2003 and 2002, the carrying value of
structured settlements totaled $173,216 and $159,734, respectively, while the
estimated fair value of these contracts totaled $189,440 and $178,609,
respectively. Universal life deposits:The Company retains the right to change interest rates
on its universal life deposits subject to a minimum interest rate provided in
the policy. As a result, the carrying value of these contracts approximates
their fair value. NOTE 7. COMPREHENSIVE INCOME Comprehensive income is composed of net income and other comprehensive income,
which includes unrealized appreciation of investments, net of tax. The components of other comprehensive income for the years ended December 31
are as follows: (Restated)
    
    2003
    
    2002
    
    2001Unrealized holding gains (losses) arising
during period, net of related offsets
    
    $
    34,448
    
    
    $
    11,497
    
    
    ($
    886
    )Less: (gains) losses included in net income
    
    
    (13,176
    )
    
    
    9,610
    
    
    
    19,646Net unrealized holding gains arising
during period, net of related offsets
    
    
    21,272
    
    
    
    21,107
    
    
    
    18,760Income tax expense related to unrealized
gains
    
    
    (7,446
    )
    
    
    (7,388
    )
    
    
    (6,565
    )Other comprehensive income, net of tax
    
    $
    13,826
    
    
    $
    13,719
    
    
    $
    12,195
 The Accumulated Other Comprehensive Income balances of $44,603 and $30,777 as
of December 31, 2003 and 2002, respectively, relate entirely to the unrealized
appreciation of investments, net of tax. 40




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##### Table of Contents



NOTE 8. LIABILITY FOR UNPAID POLICY AND CONTRACT CLAIMS Activity in the liability for unpaid policy and contract claims is as follows: 2003
    
    2002
    
    2001Balance at January 1
    
    $
    2,362
    
    
    $
    1,950
    
    
    $
    2,473Less reinsurance recoverables
    
    
    (915
    )
    
    
    (1,022
    )
    
    
    (168
    )Net balance at January 1
    
    
    1,447
    
    
    
    928
    
    
    
    2,305Total death claims incurred
    
    
    15,197
    
    
    
    15,547
    
    
    
    13,338Total death claims paid, net
of reinsurance recoveries
    
    
    15,097
    
    
    
    15,027
    
    
    
    14,715Net balance at December 31
    
    
    1,547
    
    
    
    1,448
    
    
    
    928Plus reinsurance recoverables
    
    
    2,106
    
    
    
    914
    
    
    
    1,022Balance at December 31
    
    $
    3,653
    
    
    $
    2,362
    
    
    $
    1,950
 Included in the 2002 total death claims paid is payment of a claim related to a
former president and CEO of the Company totaling $739, net of reinsurance
recoveries. NOTE 9. ANNUITY AND UNIVERSAL LIFE DEPOSITS The Company offers, among other products, annuity and universal life insurance.
The amount received as deposits for each of the years ended December 31 are as
follows: 2003
    
    2002
    
    2001Deposits:Universal life
    
    $
    13,326
    
    
    $
    12,176
    
    
    $
    12,238Annuity
    
    
    144,202
    
    
    
    175,509
    
    
    
    69,754Total
    
    $
    157,528
    
    
    $
    187,685
    
    
    $
    81,992
 For information related to annuity products sold to affiliates, see Note 11,
Related Party Transactions. NOTE 10. FEDERAL INCOME TAXES The provision for federal income taxes consists of the following for the years
ended December 31: (Restated)
    
    2003
    
    2002
    
    2001Currently due
    
    $
    13,118
    
    
    $
    4,504
    
    
    $
    1,361Deferred
    
    
    1,700
    
    
    
    1,132
    
    
    
    337Total
    
    $
    14,818
    
    
    $
    5,636
    
    
    $
    1,698
 A reconciliation of the provision for income taxes with amounts determined by
applying the statutory federal income tax rates to pretax income is as follows: (Restated)
    
    2003
    
    2002
    
    2001Federal income taxes at statutory rates
    
    $
    16,557
    
    
    $
    5,677
    
    
    $
    1,714Dividends received deduction and
tax-exempt interest
    
    
    (3
    )
    
    
    (18
    )
    
    
    (33
    )Other
    
    
    (1,736
    )
    
    
    (23
    )
    
    
    17Provision for federal income taxes
    
    $
    14,818
    
    
    $
    5,636
    
    
    $
    1,698
 41




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##### Table of Contents



The Company recorded an adjustment to deferred income taxes during the fourth
quarter of 2003. Deferred tax liabilities established in previous years to
reflect potential income tax exposures were determined to be unnecessary and
the amounts provided were reversed during the fourth quarter. The one-time
non-cash reduction in deferred taxes of $1.3 million, increased fourth quarter
earnings by $0.14 per share. Temporary differences between the financial statement carrying amounts and tax
bases of assets and liabilities that give rise to deferred income tax assets
and liabilities for the years ended December 31 are as follows: (Restated)
    
    2003
    
    2002Deferred tax assets:Liability for future life and annuity
policy benefits
    
    ($
    9,656
    )
    
    ($
    8,032
    )Write-down of investments
    
    
    (2,242
    )
    
    
    (1,736
    )Deferred compensation
    
    
    (1,245
    )
    
    
    (962
    )Total deferred tax assets
    
    
    (13,143
    )
    
    
    (10,730
    )Deferred tax liabilities:Deferred policy acquisition costs
    
    
    33,717
    
    
    
    27,490Unrealized gains on investment
    
    
    23,982
    
    
    
    19,462Other
    
    
    2,257
    
    
    
    1,446Total deferred tax liabilities
    
    
    59,956
    
    
    
    48,398Net deferred income tax liability
    
    $
    46,813
    
    
    $
    37,668
 NOTE 11. RELATED PARTY TRANSACTIONS Expense allocations Allocations from EIC for operating expenses paid on behalf of the Company are
made on a monthly basis. The Company reimburses EIC when the expenses are paid.
The amount of these cash settlements for the Company totaled $26,081, $23,784
and $18,545 in 2003, 2002 and 2001, respectively. The employees of the Company participate in the pension and other employee
benefit plans of EIC. The pension benefits are based on years of service and
salary. Pension costs are funded by EIC in amounts sufficient to at least meet
ERISA minimum funding requirements. The Company, through EIC, also participates
in certain deferred compensation and supplemental pension plans for certain
executive and senior officers. The amounts recorded by the Company for the
deferred compensation and supplemental pension plan totaled $1,039, $748 and
$553 at December 31, 2003, 2002 and 2001, respectively, which will be settled
in cash to EIC as payments are made under these plans. The pension and related
benefit costs allocated to the Company from EIC equaled $191, $6 and ($96) in
2003, 2002 and 2001, respectively. Notes payable to EIC The Company has a $15,000 surplus note payable to EIC. This note bears an
annual interest rate of 6.45%. Interest on the surplus note is scheduled to be
paid semiannually, subject to approval of the Pennsylvania Insurance
Commissioner. The note will be payable on demand on or after December 31, 2005,
subject to approval by the Pennsylvania Insurance Commissioner. Interest paid
on this note totaled $968 in 2003, 2002 and 2001. During the third quarter of 2003, the Company issued a $25,000 surplus note to
EIC in exchange for $25,000 in cash. This surplus note bears an annual interest
rate of 6.70% and is scheduled to be paid semiannually, subject to approval of
the Pennsylvania Insurance Commissioner. The surplus note will be payable on
demand on or after December 31, 2018, subject to approval by the Pennsylvania
Insurance Commissioner. The Company paid interest totaling $582 on this note in
2003. 42




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##### Table of Contents



Real estate The Company owns certain real estate it leases to EIC. The real estate is
recorded net of accumulated depreciation of $1,694 and $1,611 at December 31,
2003 and 2002, respectively. Rentals paid by EIC to the Company totaled $320,
$318 and $312 in 2003, 2002 and 2001, respectively. Future minimum rentals
under this agreement are as follows: 2004
    
    $
    3282005
    
    
    3312006
    
    
    3372007
    
    
    3412008
    
    
    113Total
    
    $
    1,450
 Software and equipment EIC purchased certain software and equipment for use by the Company.
Depreciation and applicable interest are charged to the Company throughout the
estimated useful life of the asset and is included in general expenses.
Depreciation and interest charged the Company in 2003, 2002 and 2001 amounted
to $679, $672 and $701, respectively. Annuities sold to affiliates The Erie Insurance Group Retirement Plan for employees purchases from the
Company individual annuities for some terminated vested employees or
beneficiaries receiving benefits. These are nonparticipating annuity contracts
under which the Company has unconditionally contracted to provide specified
benefits to beneficiaries in return for a fixed premium from the plan. Due to
the current interest rate environment, the Erie Insurance Group Retirement Plan
for employees did not purchase any annuities from the Company in 2003. Annuity
deposits in 2002 and 2001 included $149 and $4,513, respectively, of deposits
on annuity contracts purchased by the Erie Insurance Group Retirement Plan for
employees. Annuity deposit balances outstanding relating to pension annuities
sold to the Erie Insurance Group Retirement Plan are $45,011 and $47,331 at
December 31, 2003 and 2002, respectively.
The Erie Insurance Group 401(k) plan for employees includes an investment
option in a Company annuity. Annuity deposits in 2003, 2002 and 2001 included
$2,580, $2,182 and $1,912, respectively, of deposits on annuity contracts
purchased by Erie Insurance Group employees through the 401(k) plan. Annuity
deposit balances outstanding relating to 401(k) annuities sold to employees are
$28,034 and $25,081 at December 31, 2003 and 2002, respectively. The Erie Insurance Group affiliated property/casualty insurance companies
periodically purchase annuities from the Company in connection with the
structured settlement of claims. Considerations recorded in annuity deposits in
the Statements of Financial Position from structured settlement annuities sold
to affiliated property/casualty companies of the Erie Insurance Group totaled
$20,884, $18,564 and $12,879 in 2003, 2002 and 2001, respectively. The reserves
held for structured settlement annuities sold to the affiliated
property/casualty insurance companies equal $201,941 and $186,180 at December
31, 2003 and 2002, respectively. NOTE 12. REINSURANCE The Company has entered into various reinsurance treaties for the purpose of
ceding the excess of life insurance over the Companys established retention
limits. Reinsurance contracts do not relieve the Company from its obligations
to policyholders. Failure of reinsurers to honor their obligations could result
in losses to the Company. The Company considers all of its reinsurance assets
to be collectible; therefore, no allowance has been established for
uncollectible amounts. 43




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##### Table of Contents



Generally, the Companys retention limit is $300 per life for individual
coverage. For its disability income product, the Company has a 50% coinsurance
agreement with its reinsurer. As of December 31, 2003 and 2002, $9.8 billion
and $7.0 billion, respectively, of life insurance in force was ceded to other
companies. The Companys most significant reinsurance relationship is with
Generali USA Reassurance Company (Generali) (formerly Business Mens Assurance
Company of America), which reinsures a portion of the Companys life and
accident and health business. At December 31, 2003, the amount of in-force life
insurance ceded to Generali totaled approximately $5.6 billion. The Companys newest products, ERIE Flagship TermSM2 and ERIE Target TermSM are
reinsured 50% and 90%, respectively, with nonaffiliated reinsurers. Sales of
ERIE Flagship TermSM, ERIE Flagship TermSM2 and the ERIE Target TermSM continue
to result in increased ceded reinsurance balances. Policy revenue ceded to
Generali totaled $7,234, $5,816 and $3,956 for the years ended December 31,
2003, 2002 and 2001, respectively.
The effect of ceded reinsurance in the Statements of Operations is as follows: (Restated)
    
    2003
    
    2002
    
    2001RevenuesDirect policy revenue
    
    $
    72,947
    
    
    $
    63,426
    
    
    $
    54,549Policy revenue ceded
    
    
    (17,015
    )
    
    
    (12,297
    )
    
    
    (8,058
    )Net policy revenue
    
    
    55,932
    
    
    
    51,129
    
    
    
    46,491Net investment income
    
    
    76,966
    
    
    
    66,286
    
    
    
    61,181Net realized gains (losses) on investments
    
    
    13,176
    
    
    
    (9,610
    )
    
    
    (19,646
    )Equity in earnings of limited partnerships
    
    
    1,296
    
    
    
    3,664
    
    
    
    736Other income
    
    
    844
    
    
    
    815
    
    
    
    752Total revenues
    
    
    148,214
    
    
    
    112,284
    
    
    
    89,514Benefits and expensesDeath benefits
    
    
    19,933
    
    
    
    18,462
    
    
    
    15,833Reinsurance recoveries
    
    
    (4,736
    )
    
    
    (2,915
    )
    
    
    (2,495
    )Net death benefits
    
    
    15,197
    
    
    
    15,547
    
    
    
    13,338Interest on deposits and other policyholder
benefits
    
    
    50,400
    
    
    
    48,754
    
    
    
    44,436Increase in future life policy benefits
    
    
    13,846
    
    
    
    8,566
    
    
    
    8,792Reinsurance reserve credits
    
    
    (6,635
    )
    
    
    (2,003
    )
    
    
    (3,044
    )Net increase in future life policy benefits
    
    
    7,211
    
    
    
    6,563
    
    
    
    5,748Amortization of deferred policy acquisition
costs
    
    
    7,477
    
    
    
    7,287
    
    
    
    4,726Commissions
    
    
    10,316
    
    
    
    10,839
    
    
    
    6,311Reinsurance commission allowance
    
    
    (7,637
    )
    
    
    (7,033
    )
    
    
    (3,886
    )Net commissions
    
    
    2,679
    
    
    
    3,806
    
    
    
    2,425General expenses, taxes, licenses and fees
    
    
    17,945
    
    
    
    14,106
    
    
    
    13,941Total benefits and expenses
    
    
    100,909
    
    
    
    96,063
    
    
    
    84,614Income before income taxes
    
    $
    47,305
    
    
    $
    16,221
    
    
    $
    4,900
 44




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NOTE 13. SUPPLEMENTARY DATA ON CASH FLOWS A reconciliation of net income to net cash provided by operating activities as
presented in the Statements of Cash Flows for the years ended December 31 is as
follows: (Restated)
    
    2003
    
    2002
    
    2001Cash flows from operating activitiesNet income
    
    $
    32,487
    
    
    $
    10,585
    
    
    $
    3,202Adjustments to reconcile net income to net
cash provided by operating activities:Amortization of deferred policy acquisition
costs
    
    
    7,477
    
    
    
    7,287
    
    
    
    4,726Other amortization
    
    
    790
    
    
    
    311
    
    
    
    577Deferred federal income tax expense
    
    
    1,700
    
    
    
    1,132
    
    
    
    337Realized (gains) losses on investments
    
    
    (13,176
    )
    

    
    9,610
    
    
    
    19,646Equity in earnings of limited partnerships
    
    
    (1,296
    )
    
    
    (3,664
    )
    
    
    (736
    )Increase in premiums receivable
    
    
    (1,120
    )
    
    
    (1,135
    )
    
    
    (480
    )Decrease (increase) in other receivables
    
    
    1,351
    
    
    
    (1,114
    )
    
    
    18(Increase) decrease in accrued investment income
    
    
    (1,735
    )
    
    
    (1,833
    )
    
    
    518Policy acquisition costs deferred
    
    
    (19,006
    )
    
    
    (22,021
    )
    
    
    (12,732
    )Decrease in other assets
    
    
    69
    
    
    
    1,719
    
    
    
    597Decrease (increase) in prepaid federal income taxes
    
    
    692
    
    
    
    5,834
    
    
    
    (8,341
    )Increase in reinsurance recoverables and reserve
credits
    
    
    (8,041
    )
    
    
    (1,941
    )
    
    
    (4,207
    )Increase in future policy benefits and claims
    
    
    15,296
    
    
    
    8,983
    
    
    
    8,271(Decrease) increase in other policyholder funds
    
    
    (4,479
    )
    
    
    6,361
    
    
    
    3,359Increase (decrease) in reinsurance premium due
    
    
    283
    
    
    
    (150
    )
    
    
    847Increase in accounts payable and due to affiliates
    
    
    121
    
    
    
    2,839
    
    
    
    2,395Net cash provided by operating activities
    
    $
    11,413
    
    
    $
    22,803
    
    
    $
    17,997
 NOTE 14. COMMITMENTS AND CONTINGENCIES Commitments The Company has outstanding commitments to invest up to $1.5 million in limited
partnerships at December 31, 2003. These commitments will be funded as required
through the end of the respective investment periods, which typically span 3 to
5 years. Contingencies The Company is involved in litigation arising in the ordinary course of
business. In the opinion of management, the effects, if any, of such litigation
are not expected to be material to the Companys financial condition. NOTE 15. SEGMENT INFORMATION The Company offers a range of products and services, but operates as one
reportable life insurance segment. The Companys Traditional Life insurance
line includes permanent life, endowment life, term life and whole life
policies. The Universal Life line includes all fixed universal life products
sold by the Company. Variable universal life products are not sold by the
Company. The Fixed Annuities line includes fixed ordinary deferred annuities,
tax advantaged deferred annuities, annuities in pay-out and structured
settlements. Neither variable nor equity indexed annuity products are sold by
the Company. The Group Life and Other line includes group life insurance and 45




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disability income products. The Corporate Account includes investment income
earned from surplus not specifically allocable to any one product type.
Investment-related income is allocated based on the assumption that the fixed
maturities and preferred stock portfolios support the insurance product lines
and the common stock, limited partnership and remaining fixed maturity
investments support the Corporate Account. Because the Company sold its entire
common stock portfolio at the end of 2002, relatively more of the fixed
maturity portfolio will support the Corporate Account in future periods. The loss recorded in the Fixed Annuities line for the year ended December 31,
2002, is a direct result of the $24,697 of impairment charges recognized on
fixed maturity investments during 2002. The 2002 increase in investment-related
and other income in the Corporate Account is a result of $8,683 in net realized
gains on the sale of common stock in 2002. The 2001 results in the Corporate
Account investment-related income were due to realized losses on common stock
totaling $16,356. Traditional
    
    Universal
    
    Fixed
    
    Group Life
    
    Corporate(Restated)
    
    Life
    
    Life
    
    Annuities
    
    & Other
    
    Account
    
    Total2003:Total policy revenue, net of reinsurance
    
    $
    38,695
    
    
    $
    13,350
    
    
    $
    5
    
    
    $
    3,882
    
    
    $
    0
    
    
    $
    55,932Total net investment income and other
income
    
    
    6,857
    
    
    
    8,897
    
    
    
    54,329
    
    
    
    168
    
    
    
    8,855
    
    
    
    79,106Net realized capital gains
    
    
    1,191
    
    
    
    1,421
    
    
    
    9,417
    
    
    
    29
    
    
    
    1,118
    
    
    
    13,176Total revenues
    
    
    46,743
    
    
    
    23,668
    
    
    
    63,751
    
    
    
    4,079
    
    
    
    9,973
    
    
    
    148,214Less: Total benefits and expenses
    
    
    34,331
    
    
    
    15,903
    
    
    
    47,431
    
    
    
    3,244
    
    
    
    0
    
    
    
    100,909Income before income taxes
    
    $
    12,412
    
    
    $
    7,765
    
    
    $
    16,320
    
    
    $
    835
    
    
    $
    9,973
    
    
    $
    47,3052002:Total policy revenue, net of reinsurance
    
    $
    35,860
    
    
    $
    12,209
    
    
    $
    3
    
    
    $
    3,057
    
    
    $
    0
    
    
    $
    51,129Total net investment income and other
income
    
    
    6,381
    
    
    
    8,227
    
    
    
    46,294
    
    
    
    157
    
    
    
    9,706
    
    
    
    70,765Net realized capital (losses) gains
    
    
    (1,547
    )
    
    
    (1,819
    )
    
    
    (11,198
    )
    
    
    (38
    )
    
    
    4,992
    
    
    
    (9,610
    )Total revenues
    
    
    40,694
    
    
    
    18,617
    
    
    
    35,099
    
    
    
    3,176
    
    
    
    14,698
    
    
    
    112,284Less: Total benefits and expenses
    
    
    33,460
    
    
    
    16,864
    
    
    
    43,459
    
    
    
    2,280
    
    
    
    0
    
    
    
    96,063Income (loss) before income taxes
    
    $
    7,234
    
    
    $
    1,753
    
    
    ($
    8,360
    )
    
    $
    896
    
    
    $
    14,698
    
    
    $
    16,2212001:Total policy revenue, net of reinsurance
    
    $
    32,685
    
    
    $
    11,008
    
    
    $
    3
    
    
    $
    2,795
    
    
    $
    0
    
    
    $
    46,491Total net investment income and other
income
    
    
    6,446
    
    
    
    7,899
    
    
    
    42,914
    
    
    
    164
    
    
    
    5,246
    
    
    
    62,669Net realized capital losses
    
    
    (471
    )
    
    
    (527
    )
    
    
    (3,128
    )
    
    
    (12
    )
    
    
    (15,508
    )
    
    
    (19,646
    )Total revenues
    
    
    38,660
    
    
    
    18,380
    
    
    
    39,789
    
    
    
    2,947
    
    
    
    (10,262
    )
    
    
    89,514Less: Total benefits and expenses
    
    
    28,967
    
    
    
    14,740
    
    
    
    37,393
    
    
    
    3,514
    
    
    
    0
    
    
    
    84,614Income (loss) before income taxes
    
    $
    9,693
    
    
    $
    3,640
    
    
    $
    2,396
    
    
    ($
    567
    )
    
    ($
    10,262
    )
    
    $
    4,900
 NOTE 16. STATUTORY INFORMATION The Company prepares its statutory financial statements in accordance with
accounting practices prescribed by the Pennsylvania Insurance Department.
Prescribed Statutory Accounting Practices (SAP) include state laws, regulations
and general administrative rules, as well as a variety of publications from the
National Association of Insurance Commissioners (NAIC). Accounting principles
used to prepare statutory financial statements differ from financial statements
prepared on the basis of generally accepted accounting principles. 46




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A reconciliation of net income as filed with regulatory authorities to net
income reported in the accompanying financial statements for the years ended
December 31, 2003, 2002 and 2001, follows: (Restated)
    
    2003
    
    2002
    
    2001Statutory net income (loss)
    
    $
    15,404
    
    
    ($
    8,625
    )
    
    ($
    5,065
    )Reconciling items:Policy liabilities and accruals
    
    
    1,224
    
    
    
    3,568
    
    
    
    831Deferred policy acquisition costs,
net of amortization
    
    
    11,529
    
    
    
    14,734
    
    
    
    8,006Investment valuation differences
    
    
    6,747
    
    
    
    3,372
    
    
    
    2,084GAAP deferred taxes
    
    
    (1,700
    )
    
    
    (1,132
    )
    
    
    (337
    )Deferred and uncollected premiums
    
    
    (1,764
    )
    
    
    (2,034
    )
    
    
    (1,557
    )Limited partnership income
    
    
    1,295
    
    
    
    950
    
    
    
    (500
    )Other
    
    
    (248
    )
    
    
    (248
    )
    
    
    (260
    )GAAP net income
    
    $
    32,487
    
    
    $
    10,585
    
    
    $
    3,202
 A reconciliation of shareholders equity as filed with regulatory authorities
to shareholders equity reported in the accompanying financial statements as of
December 31, 2003 and 2002, follows: (Restated)
    
    2003
    
    2002Statutory shareholders equity
    
    $
    124,633
    
    
    $
    93,319Reconciling items:Asset valuation and interest maintenance
reserves
    
    
    30,836
    
    
    
    21,990Investment valuation differences
    
    
    83,060
    
    
    
    56,010Deferred policy acquisition costs
    
    
    98,207
    
    
    
    92,897Surplus note
    
    
    (40,000
    )
    
    
    (15,000
    )Policy liabilities and accruals
    
    
    18,848
    
    
    
    17,624Difference between statutory and GAAP
deferred taxes
    
    
    (48,759
    )
    
    
    (40,403
    )Deferred and uncollected premiums
    
    
    (12,697
    )
    
    
    (10,933
    )Capitalized salaries and benefits, net of amortization
    
    
    1,435
    
    
    
    1,684GAAP shareholders equity
    
    $
    255,563
    
    
    $
    217,188
 The minimum statutory capital and surplus requirements under Pennsylvania law
for stock life insurance companies (Section 386 of the PA Insurance Code)
amounts to $1,650. The Companys total statutory capital and surplus well
exceeded these minimum requirements. The amount of dividends the Company can pay to its shareholders without the
prior approval of the Pennsylvania Insurance Commissioner is limited by statute
to the greater of: (a) 10% of its statutory surplus as regards policyholders as
shown on its last annual statement on file with the commissioner, or (b) the
net income as reported for the period covered by such annual statement, but
shall not include pro rata distribution of any class of the insurers own
securities. Accordingly, the maximum dividend payout which may be made in 2004
without prior Pennsylvania Commissioner approval is $15,404. Dividends declared
to shareholders totaled $7,938 in both 2003 and 2002. Bonds having a carrying value of $2,113 at December 31, 2003, were on deposit
with various regulatory authorities as required by law. The carrying value of
these bonds are not material for separate disclosure on the Companys
Statements of Financial Position and are included with fixed maturities. 47




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NOTE 17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following results are unaudited. In the opinion of the Companys
management, all adjustments  consisting only of normal recurring accruals 
necessary for a fair presentation of the interim periods presented have been
included. First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    Quarter2003 (Restated)Total net policy revenue
    
    $
    13,089
    
    
    $
    14,334
    
    
    $
    13,598
    
    
    $
    14,911Net investment income
    
    
    18,584
    
    
    
    19,843
    
    
    
    18,932
    
    
    
    19,607Net realized gains on investments
    
    
    2,162
    
    
    
    2,099
    
    
    
    4,908
    
    
    
    4,007Equity in earnings (losses) of limited partnerships
    
    
    280
    
    
    
    120
    
    
    
    1,394
    
    
    
    (498
    )Other income
    
    
    177
    
    
    
    217
    
    
    
    264
    
    
    
    186Total revenues
    
    
    34,292
    
    
    
    36,613
    
    
    
    39,096
    
    
    
    38,213Total benefits and expenses
    
    
    26,240
    
    
    
    24,640
    
    
    
    24,279
    
    
    
    25,750Income before income taxes
    
    
    8,052
    
    
    
    11,973
    
    
    
    14,817
    
    
    
    12,463Provision for federal income taxes
    
    
    2,793
    
    
    
    4,155
    
    
    
    5,140
    
    
    
    2,730
    (1)Net income
    
    $
    5,259
    
    
    $
    7,818
    
    
    $
    9,677
    
    
    $
    9,733Net income per share
    
    $
    0.56
    
    
    $
    0.83
    
    
    $
    1.02
    
    
    $
    1.03Comprehensive income (loss)
    
    $
    12,533
    
    
    $
    33,296
    
    
    
    ($4,379
    )
    
    $
    4,8622002 (Restated)Total net policy revenue
    
    $
    12,329
    
    
    $
    13,518
    
    
    $
    12,311
    
    
    $
    12,971Net investment income
    
    
    14,510
    
    
    
    16,998
    
    
    
    16,517
    
    
    
    18,261Net realized gains (losses) on investments
    
    
    2,054
    
    
    
    (7,698
    )
    
    
    (5,235
    )
    
    
    1,269Equity in earnings (losses) of limited partnerships
    
    
    1,069
    
    
    
    2,513
    
    
    
    151
    
    
    
    (69
    )Other income
    
    
    244
    
    
    
    177
    
    
    
    139
    
    
    
    255Total revenues
    
    
    30,206
    
    
    
    25,508
    
    
    
    23,883
    
    
    
    32,687Total benefits and expenses
    
    
    23,713
    
    
    
    22,887
    
    
    
    22,279
    
    
    
    27,184Income before income taxes
    
    
    6,493
    
    
    
    2,621
    
    
    
    1,604
    
    
    
    5,503Provision for federal income taxes
    
    
    2,245
    
    
    
    912
    
    
    
    558
    
    
    
    1,921Net income
    
    $
    4,248
    
    
    $
    1,709
    
    
    $
    1,046
    
    
    $
    3,582Net income per share
    
    $
    0.45
    
    
    $
    0.18
    
    
    $
    0.11
    
    
    $
    0.38Comprehensive (loss) income
    
    ($
    4,637
    )
    
    $
    7,037
    
    
    $
    14,319
    
    
    $
    7,585
 48




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First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    Quarter2001 (Restated)Total net policy revenue
    
    $
    10,997
    
    
    $
    11,861
    
    
    $
    11,295
    
    
    $
    12,338Net investment income
    
    
    14,709
    
    
    
    15,865
    
    
    
    14,744
    
    
    
    15,863Net realized gains (losses) on investments
    
    
    594
    
    
    
    (1,067
    )
    
    
    (2,034
    )
    
    
    (17,139
    )(2)Equity in (losses) earnings of limited partnerships
    
    
    (965
    )
    
    
    1,767
    
    
    
    614
    
    
    
    (680
    )Other income
    
    
    191
    
    
    
    178
    
    
    
    317
    
    
    
    66Total revenues
    
    
    25,526
    
    
    
    28,604
    
    
    
    24,936
    
    
    
    10,448Total benefits and expenses
    
    
    20,335
    
    
    
    19,699
    
    
    
    20,778
    
    
    
    23,802Income (loss) before income taxes
    
    
    5,191
    
    
    
    8,905
    
    
    
    4,158
    
    
    
    (13,354
    )Provision for federal income taxes (benefit)
    
    
    1,796
    
    
    
    3,076
    
    
    
    1,446
    
    
    
    (4,620
    )Net income (loss)
    
    $
    3,395
    
    
    $
    5,829
    
    
    $
    2,712
    
    
    $
    (8,734
    )Net income (loss) per share
    
    $
    0.36
    
    
    $
    0.62
    
    
    $
    0.29
    
    
    $
    (0.93
    )Comprehensive income (loss)
    
    $
    7,444
    
    
    $
    6,923
    
    
    $
    4,920
    
    
    $
    (3,890
    )
  (1)
    
    The Company recorded an adjustment to deferred income taxes during the
fourth quarter of 2003. Deferred tax liabilities established in previous
years to reflect potential income tax exposures were determined to be
unnecessary and the amounts provided were reversed during the fourth
quarter. The one-time non-cash reduction in deferred taxes increased
fourth quarter earnings by $0.14 per share.  (2)
    
    Net realized losses on investments in the fourth quarter of 2001 resulted
primarily from sales of fixed maturities and common stock as part of a
proactive year-end tax-planning strategy. As further reported in Note 18, the following describes the impact of the errors by quarter: First
    
    Second
    
    Third
    
    Fourth2003
    
    Quarter
    
    Quarter
    
    Quarter
    
    QuarterAs originally reported:Net income
    
    $
    5,406
    
    
    $
    7,814
    
    
    $
    9,984
    
    
    $
    11,142Net income per share
    
    $
    0.57
    
    
    $
    0.83
    
    
    $
    1.05
    
    
    $
    1.18As restated:Net income
    
    $
    5,259
    
    
    $
    7,818
    
    
    $
    9,677
    
    
    $
    9,733Net income per share
    
    $
    0.56
    
    
    $
    0.83
    
    
    $
    1.02
    
    
    $
    1.03
 2002As originally reported:Net income
    
    $
    4,386
    
    
    $
    1,006
    
    
    $
    490
    
    
    $
    2,958Net income per share
    
    $
    0.46
    
    
    $
    0.11
    
    
    $
    0.05
    
    
    $
    0.32As restated:Net income
    
    $
    4,248
    
    
    $
    1,709
    
    
    $
    1,046
    
    
    $
    3,582Net income per share
    
    $
    0.45
    
    
    $
    0.18
    
    
    $
    0.11
    
    
    $
    0.38
 2001As originally reported:Net income (loss)
    
    $
    3,441
    
    
    $
    5,657
    
    
    $
    2,519
    
    
    $
    (8,879
    )Net income (loss) per share
    
    $
    0.36
    
    
    $
    0.60
    
    
    $
    0.27
    
    
    $
    (0.94
    )As restated:Net income (loss)
    
    $
    3,395
    
    
    $
    5,829
    
    
    $
    2,712
    
    
    $
    (8,734
    )Net income (loss) per share
    
    $
    0.36
    
    
    $
    0.62
    
    
    $
    0.29
    
    
    $
    (0.93
    )
 NOTE 18. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS During the second quarter of 2004, the Company completed a comprehensive
analysis of its deferred acquisition cost asset. During the analysis, the
Company determined that amounts previously reported for deferred acquisition
costs and related amortization were incorrectly determined due to errors in the
underlying computations. In order to correct these errors, the Company has
restated its previously issued financial statements. The impact of the
restatement to net income and net income per share for the years ended December
31, 2003, 2002 and 2001, and deferred policy acquisition costs and shareholders equity as of December 31, 2003 and
2002 follows: 2003
    
    2002
    
    2001As originally reported:Net income
    
    $
    34,346
    
    
    $
    8,840
    
    
    $
    2,738Net income per share
    
    $
    3.63
    
    
    $
    0.94
    
    
    $
    0.29As restated:Net income
    
    $
    32,487
    
    
    $
    10,585
    
    
    $
    3,202Net income per share
    
    $
    3.44
    
    
    $
    1.12
    
    
    $
    0.34
 December 31,
    
    December 31,2003
    
    2002As originally reported:Deferred policy acquisition costs
    
    $
    103,874
    
    
    $
    104,065Shareholders equity
    
    $
    259,247
    
    
    $
    224,447As restated:Deferred policy acquisition costs
    
    $
    98,207
    
    
    $
    92,897Shareholders equity
    
    $
    255,563
    
    
    $
    217,188
 In connection with the above described restatement, the following
footnotes have been revised to reflect restatements: 4,5,7,10,12,13,15,16 and 17. 49




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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE As previously reported in the Registrants Form 10-K annual report for the year
ended December 31, 2002 that was filed with the Commission on March 27, 2003,
the Company appointed Ernst & Young, LLP to be the Companys independent
accountants for the Companys 2003 Financial Statements. On March 27, 2003,
Malin, Bergquist & Company, LLP was dismissed as the Companys independent
auditors. The Audit Committee of the Company annually considers the selection
of the Companys independent auditors. The Audit Committee has the sole
authority to engage the Companys independent auditors. 
 ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures In its Form 10-K Annual
Report for 2003 as originally filed with the Securities and Exchange Commission
(the SEC) on March 8, 2004, as amended on April 1, 2004 (the
Original Filing), the Company reported a weakness in internal
control over the processes used to determine the recorded amount of deferred
acquisition costs (DAC) and related DAC amortization. The
Companys independent auditors, Ernst & Young, LLP, in conjunction with
their audit of the Companys 2003 financial statements, characterized this
weakness as a material weakness, as defined in Statement on Auditing Standards
No. 60. The material weakness was communicated to the Companys management
and the Audit Committee of the Board of Directors. As reported in the Original
Filing, management developed a plan in collaboration with the Audit Committee of
the Board to correct this weakness in internal control during 2004. The plan
entails evaluation of DAC accounting issues, implementation of improved
procedures and controls over periodic DAC computations and balances, ongoing
evaluation of underlying assumptions, monitoring of DAC trends and ratios and
the installation of improved valuation systems. The plan has been reviewed with,
and progress is being monitored by, the Audit Committee of the Board and Company
management, including the Chief Executive Officer and the Chief Financial
Officer. Subsequent to the Original
Filing and pursuant to the plan, the Company completed its evaluation of DAC
accounting issues and has identified adjustments to its previously issued
financial statements that require restatement (the Restatement). For
additional discussion of the Restatement and the individual restatement
adjustments, see the Explanatory Note to this Amendment No. 2 and Item 8.
Financial Statements and Supplementary DataNote 18, Restatement of
Previously Issued Financial Statements. The Company has also made
substantive progress in correcting the material weakness through the date of the
filing of this Amendment No. 2. An independent consulting actuary engaged by the
Company is providing oversight over the team of internal actuarial and
accounting personnel implementing the plan, and providing direction and guidance
in evaluating past practices and in implementing procedures and controls
regarding actuarial functions. The Company has effected
certain improvements to its DAC accounting procedures. For example, actuarial
and financial personnel have developed management reports to enable management
to better monitor DAC trends and ratios which increase transparency in
understanding the periodic results of operations. The Company has also purchased
a new valuation system. Installation of this new system began in the second
quarter of 2004 and is expected to extend through year-end. As of the end of the period
covered by this Amendment No. 2, the Company carried out an evaluation, under
the supervision and with the participation of the Companys Chief Executive
Officer and Chief Financial Officer, pursuant to Rule 13a-15 promulgated under
the Securities Exchange Act of 1934, as amended (the Exchange Act),
of the effectiveness of the design and operation of the Companys
disclosure controls and procedures. In making the evaluation described above,
the Company considered matters relating to the Restatement including the above
described control weakness. Based on managements
evaluation, the Companys Chief Executive Officer and Chief Financial
Officer have concluded that, except for the material weakness described above,
the Companys disclosure controls and procedures are effective for
gathering, analyzing and disclosing the information the Company is required to
disclose in the reports it files under the Exchange Act within the time periods
specified in the SECs rules and forms. Other than the improvements made to
the Companys processes and controls over accounting for DAC, there have
been no significant changes in the Companys internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of managements evaluation. Changes in Internal Control Over Financial Reporting There have been no significant changes in the Companys internal controls or in
other factors that could significantly affect disclosure controls subsequent to
the date of this evaluation. 50




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##### Table of Contents



PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information with respect to directors, executive officers, audit committee,
and audit committee financial experts of the Company and Section 16(a)
beneficial ownership reporting compliance, is incorporated herein by reference
to the Companys definitive Proxy Statement relating to the Companys Annual
Meeting of Shareholders to be held on April 27, 2004, which is filed as Exhibit
20 to Form 10-K/A, filed April 1, 2004. The Company has adopted a Code of Conduct that applies to all of its directors,
officers (including its Chief Executive Officer, Chief Financial Officer, Chief
Accounting Officer, Controller and any person performing similar functions) and
employees. The Company has filed a copy of this Code of Conduct as Exhibit 14
to Form 10  K, filed March 8, 2004. The Company has also made the Code of
Conduct available on its website at http://www.erieinsurance.com. Age
    
    Present Principal Position with Erie Familyas of
    
    Life Insurance Company and Other MaterialName
    
    12/31/03
    
    Positions Held During the Last Five YearsPresident and Chief
Executive OfficerJeffrey A. Ludrof
    
    
    44
    
    
    Director since July 23, 2002; President and Chief Executive Officer
of the Company, Erie Insurance Company, Erie Indemnity Company, Flagship City Insurance
Company, Erie Insurance Property & Casualty Company, and Erie Insurance Company of New
York since May 8, 2002; Executive Vice President  Insurance Operations of the Company
1999  May 8, 2002; Senior Vice President of the Company 1994  1999. Director  the
Company, Erie Insurance Company, Erie Insurance Company of New York, Erie Insurance
Property & Casualty Company, Flagship City Insurance Company and Erie Indemnity
Company.Executive Vice PresidentsJan R. Van Gorder
    
    
    56
    
    
    Director since 1990. Senior Executive Vice President, Secretary and
General Counsel of the Company, Erie Indemnity Company, and Erie Insurance Company
since 1990 and of Flagship City Insurance Company and Erie Insurance Property &
Casualty Company since 1992 and 1993, respectively and of Erie Insurance Company of New
York since 1994. Acting President and Chief Executive Officer of the Company, Erie
Indemnity Company, Erie Insurance Company, Flagship City Insurance Company, Erie
Insurance Property & Casualty Company and Erie Insurance Company of New York from
January 19, 2002  May 8, 2002; Director  the Company, Erie Insurance Company,
Flagship City Insurance Company, Erie Insurance Property & Casualty Company, Erie
Insurance Company of New York and Erie Indemnity Company.
 51




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##### Table of Contents



Age
    
    Present Principal Position with Erie Familyas of
    
    Life Insurance Company and Other MaterialName
    
    12/31/03
    
    Positions Held During the Last Five YearsJohn J. Brinling, Jr.
    
    
    56
    
    
    Executive Vice President of the Company since December 1990. Division Officer 1984 -
present. Director-Erie Insurance Company of New York.Philip A. Garcia
    
    
    47
    
    
    Executive Vice President and Chief Financial Officer of the Company, Erie Insurance
Company, Erie Indemnity Company, Flagship City Insurance Company, Erie Insurance Property &
Casualty Company and Erie Insurance Company of New York since October 1997. Senior Vice
President and Controller 1993  1997. Director-Flagship City Insurance Company, Erie
Insurance Property & Casualty Company and Erie Insurance Company of New York.Michael J. Krahe
    
    
    50
    
    
    Executive Vice President  Human Development and Leadership since January 2003;
Senior Vice
President 1999  December 2002; Vice President 1994  1999.Thomas B. Morgan
    
    
    40
    
    
    Executive Vice President  Insurance Operations since January 2003; Senior Vice
President
October 2001 - December 2003; Assistant Vice President and Branch Manager 1997  October
2001; Independent Insurance Agent 1988  1997; Director Erie Insurance Company of New York,
Erie Insurance Property & Casualty Company and Flagship City Insurance Company.Senior Vice PresidentDouglas F. Ziegler
    
    
    53
    
    
    Senior Vice President, Treasurer and Chief Investment Officer of the Company since 1993.
Senior Vice President, Treasurer and Chief Investment Officer of the Erie Insurance
Company, Erie Indemnity Company, Flagship City Insurance Company, Erie Insurance Property &
Casualty Company and Erie Insurance Company of New York. Director-Erie Insurance Company of
New York.
 52




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##### Table of Contents



ITEM 11. EXECUTIVE COMPENSATION The answer to this item is incorporated by reference to the Companys
definitive Proxy Statement relating to the Annual Meeting of Shareholders to be
held on April 27, 2004, which is filed as Exhibit 20 to Form 10-K/A, filed
April 1, 2004. 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS The information with respect to security ownership of certain beneficial owners
and management and securities authorized for issuance under equity compensation
plans, is incorporated by reference to the Companys definitive Proxy Statement
relating to the Annual Meeting of Shareholders to be held on April 27, 2004,
which is filed as Exhibit 20 to Form 10-K/A, filed April 1, 2004. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to certain relationships with Company directors is
incorporated by reference to the Companys definitive Proxy Statement relating
to the Annual Meeting of Shareholders to be held on April 27, 2004, which is
filed as Exhibit 20 to Form 10-K/A, filed April 1, 2004. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this Item is incorporated by reference to the
Companys definitive Proxy Statement relating to the Annual Meeting of
Shareholders to be held on April 27, 2004, which is filed as Exhibit 20 to Form
10-K/A, filed April 1, 2004. 53




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##### Table of Contents



Part IV 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K  (a)
    (1)
    The following financial statements of the Company and the reports of
independent certified public accountants are incorporated herein by
reference to Item 8 of this Form 10-K/A. Independent Auditors Reports
Statements of Financial Position  December 31, 2003 and 2002
Statements of Operations for the years ended December 31, 2003, 2002 and 2001
Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001
Statements of Shareholders Equity for the years ended December 31, 2003, 2002 and 2001
Notes to Financial Statements  (2)
    
    The following financial statement schedules are included herein: PageSchedule I  Summary of Investments Other Than
Investments in Related Parties
    
    
    56Schedule III  Supplementary Insurance Information
    
    
    57Schedule IV  Reinsurance
    
    
    58
 All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and
therefore, have been omitted.  (3)
    
    Exhibits: See
Exhibit Index on Page 59 hereof. All exhibits for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore, have
been omitted.  (b)
    
    Reports on Form 8-K. On October 29, 2003, the Company filed a report on Form 8-K, reporting
under Item 12, that a press release had been issued reporting the
Companys earnings for the quarter ended September 30, 2003. 54




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 15(d) of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. Date: August 20, 2004     ERIE FAMILY LIFE INSURANCE COMPANY (Registrant) Principal Officers /s/ Jeffrey A. Ludrof 
  
 /s/ Philip A. Garcia 
 /s/ Timothy G. NeCastro 
  Board of Directors Kaj Ahlmann
    
    Susan Hirt Hagen/s/ John T. Baily
    
    /s/ C. Scott HartzJohn T. Baily
    
    C. Scott Hartz/s/ Samuel P. Black, III
    
    /s/ F. William HirtSamuel P. Black, III
    
    F. William Hirt/s/ Claude C. Lilly, IIIJ. Ralph Borneman, Jr.
    
    Claude C. Lilly, III/s/ Jeffrey A. LudrofWilson C. Cooney
    
    Jeffrey A. LudrofPatricia Garrison-Corbin
    
    Jan R. Van Gorder/s/ John R. Graham
    
    /s/ Robert C. WilburnJohn R. Graham
    
    Robert C. Wilburn
 55




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SCHEDULE I - SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 2003Cost or
    
    
    
    
    
    Amount at whichAmortized
    
    Market
    
    Shown in theType of Investment
    
    Cost
    
    Value
    
    Balance Sheet(In thousands)Fixed Maturities Available-for-SaleU. S. Treasuries and Government Agency
    
    $
    61,176
    
    
    $
    62,682
    
    
    $
    62,682Public Utilities
    
    
    141,154
    
    
    
    151,003
    
    
    
    151,003U. S. Banks, Trusts, and Insurance Companies
    
    
    158,731
    
    
    
    167,253
    
    
    
    167,253U. S. Industrial and Miscellaneous
    
    
    554,379
    
    
    
    595,071
    
    
    
    595,071Mortgage Backed
    
    
    145,394
    
    
    
    148,834
    
    
    
    148,834Asset Backed
    
    
    5,032
    
    
    
    5,362
    
    
    
    5,362Foreign Governments  Agency
    
    
    7,961
    
    
    
    8,046
    
    
    
    8,046Foreign Banks, Trusts, and Insurance Companies
    
    
    20,038
    
    
    
    20,151
    
    
    
    20,151Foreign Industrial and Miscellaneous
    
    
    101,130
    
    
    
    112,033
    
    
    
    112,033Foreign Public Utilities
    
    
    8,612
    
    
    
    9,892
    
    
    
    9,892Total Fixed Maturities Available-for-Sale
    
    $
    1,203,607
    
    
    $
    1,280,327
    
    
    $
    1,280,327Equity SecuritiesNonredeemable Preferred Stocks:Public Utilities
    
    $
    1,864
    
    
    $
    2,000
    
    
    $
    2,000U. S. Banks, Trusts, and Insurance Companies
    
    
    13,909
    
    
    
    15,830
    
    
    
    15,830U. S. Industrial and Miscellaneous
    
    
    17,119
    
    
    
    18,874
    
    
    
    18,874Foreign Banks, Trusts and Insurance Companies
    
    
    20,716
    
    
    
    22,652
    
    
    
    22,652Foreign Industrial and Miscellaneous
    
    
    3,000
    
    
    
    3,592
    
    
    
    3,592Total Equity Securities
    
    $
    56,608
    
    
    $
    62,948
    
    
    $
    62,948Real Estate Investment Property
    
    $
    1,127
    
    
    $
    1,127
    
    
    $
    1,127Policy Loans
    
    
    9,951
    
    
    
    9,951
    
    
    
    9,951Mortgage Loans
    
    
    6,305
    
    
    
    6,305
    
    
    
    6,305Limited Partnerships
    
    
    12,203
    
    
    
    12,241
    
    
    
    12,241Total Investments
    
    $
    1,289,801
    
    
    $
    1,372,899
    
    
    $
    1,372,899
 56




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SCHEDULE III  SUPPLEMENTARY INSURANCE INFORMATION (RESTATED) At December 31,
    
    For the Years Ended December 31,Deferred
    
    Future
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    AmortizationPolicy
    
    Policy
    
    
    
    
    
    Other
    
    
    
    
    
    Net
    
    Life &
    
    of Deferred
    
    OtherAcquisition
    
    Benefits &
    
    Unearned
    
    Policy
    
    Policy
    
    Investment
    
    Annuity
    
    Acquisition
    
    OperatingSegment
    
    Costs
    
    Deposits
    
    Premium
    
    Claims
    
    Revenues (a)
    
    Income
    
    Benefits
    
    Costs
    
    Expenses(In thousands)2003Ordinary Life
Insurance
    
    $
    91,328
    
    
    $
    255,843
    
    
    $
    251
    
    
    $
    3,406
    
    
    $
    52,045
    
    
    $
    14,784
    
    
    $
    27,906
    
    
    $
    5,597
    
    
    $
    16,731Accident & Health
    
    
    0
    
    
    
    338
    
    
    
    0
    
    
    
    0
    
    
    
    254
    
    
    
    7
    
    
    
    123
    
    
    
    0
    
    
    
    149Group Life & Other
    
    
    0
    
    
    
    2,908
    
    
    
    5
    
    
    
    247
    
    
    
    3,628
    
    
    
    158
    
    
    
    2,670
    
    
    
    0
    
    
    
    303Annuities
    
    
    6,879
    
    
    
    932,553
    
    
    
    0
    
    
    
    0
    
    
    
    5
    
    
    
    53,289
    
    
    
    42,109
    
    
    
    1,880
    
    
    
    3,441Corporate
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    8,728
    
    
    
    0
    
    
    
    0
    
    
    
    0Total
    
    $
    98,207
    
    
    $
    1,191,642
    
    
    $
    256
    
    
    $
    3,653
    
    
    $
    55,932
    
    
    $
    76,966
    
    
    $
    72,808
    
    
    $
    7,477
    
    
    $
    20,6242002Ordinary Life
Insurance
    
    $
    83,263
    
    
    $
    228,032
    
    
    $
    202
    
    
    $
    2,111
    
    
    $
    48,070
    
    
    $
    13,111
    
    
    $
    29,265
    
    
    $
    6,336
    
    
    $
    14,723Accident & Health
    
    
    0
    
    
    
    148
    
    
    
    0
    
    
    
    0
    
    
    
    167
    
    
    
    3
    
    
    
    62
    
    
    
    0
    
    
    
    87Group Life & Other
    
    
    0
    
    
    
    2,239
    
    
    
    2
    
    
    
    251
    
    
    
    2,889
    
    
    
    144
    
    
    
    1,852
    
    
    
    0
    
    
    
    279Annuities
    
    
    9,634
    
    
    
    803,675
    
    
    
    0
    
    
    
    0
    
    
    
    3
    
    
    
    43,627
    
    
    
    39,684
    
    
    
    951
    
    
    
    2,823Corporate
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    9,401
    
    
    
    0
    
    
    
    0
    
    
    
    0Total
    
    $
    92,897
    
    
    $
    1,034,094
    
    
    $
    204
    
    
    $
    2,362
    
    
    $
    51,129
    
    
    $
    66,286
    
    
    $
    70,863
    
    
    $
    7,287
    
    
    $
    17,9122001Ordinary Life
Insurance
    
    $
    76,696
    
    
    $
    205,267
    
    
    $
    212
    
    
    $
    1,729
    
    
    $
    43,693
    
    
    $
    13,500
    
    
    $
    25,044
    
    
    $
    4,142
    
    
    $
    14,521Accident & Health
    
    
    0
    
    
    
    39
    
    
    
    0
    
    
    
    0
    
    
    
    35
    
    
    
    1
    
    
    
    21
    
    
    
    0
    
    
    
    (13
    )Group Life & Other
    
    
    0
    
    
    
    2,532
    
    
    
    0
    
    
    
    221
    
    
    
    2,760
    
    
    
    161
    
    
    
    3,246
    
    
    
    0
    
    
    
    260Annuities
    
    
    7,723
    
    
    
    636,849
    
    
    
    0
    
    
    
    0
    
    
    
    3
    
    
    
    42,318
    
    
    
    35,210
    
    
    
    584
    
    
    
    1,598Corporate
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    5,201
    
    
    
    0
    
    
    
    0
    
    
    
    0Total
    
    $
    84,419
    
    
    $
    844,687
    
    
    $
    212
    
    
    $
    1,950
    
    
    $
    46,491
    
    
    $
    61,181
    
    
    $
    63,521
    
    
    $
    4,726
    
    
    $
    16,366
 (a) Net of reinsurance ceded 57




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##### Table of Contents



SCHEDULE IV - REINSURANCE PercentageCeded to
    
    Assumed
    
    
    
    
    
    of AmountGross
    
    Other
    
    From Other
    
    Net
    
    AssumedAmount
    
    Companies
    
    Companies
    
    Amount
    
    to Net(In thousands)December 31, 2003Life Insurance in force
    
    $
    27,077,945
    
    
    $
    9,788,882
    
    
    $
    0
    
    
    $
    17,289,063
    
    
    
    0.00
    %Premiums for the year:Life Insurance
    
    
    68,777
    
    
    
    16,732
    
    
    
    0
    
    
    
    52,045
    
    
    
    0.00
    %Annuities
    
    
    5
    
    
    
    0
    
    
    
    0
    
    
    
    5
    
    
    
    0.00
    %Accident & Health
    
    
    537
    
    
    
    283
    
    
    
    0
    
    
    
    254
    
    
    
    0.00
    %Group Life & Other
    
    
    3,628
    
    
    
    0
    
    
    
    0
    
    
    
    3,628
    
    
    
    0.00
    %Total Premiums
    
    $
    72,947
    
    
    $
    17,015
    
    
    $
    0
    
    
    $
    55,932
    
    
    
    0.00
    %December 31, 2002Life Insurance in force
    
    $
    23,198,178
    
    
    $
    7,043,035
    
    
    $
    0
    
    
    $
    16,155,143
    
    
    
    0.00
    %Premiums for the year:Life Insurance
    
    
    60,132
    
    
    
    12,063
    
    
    
    0
    
    
    
    48,069
    
    
    
    0.00
    %Annuities
    
    
    3
    
    
    
    0
    
    
    
    0
    
    
    
    3
    
    
    
    0.00
    %Accident & Health
    
    
    402
    
    
    
    234
    
    
    
    0
    
    
    
    168
    
    
    
    0.00
    %Group Life & Other
    
    
    2,889
    
    
    
    0
    
    
    
    0
    
    
    
    2,889
    
    
    
    0.00
    %Total Premiums
    
    $
    63,426
    
    
    $
    12,297
    
    
    $
    0
    
    
    $
    51,129
    
    
    
    0.00
    %December 31, 2001Life Insurance in force
    
    $
    18,903,134
    
    
    $
    4,112,150
    
    
    $
    0
    
    
    $
    14,790,984
    
    
    
    0.00
    %Premiums for the year:Life Insurance
    
    
    51,644
    
    
    
    7,951
    
    
    
    0
    
    
    
    43,693
    
    
    
    0.00
    %Annuities
    
    
    3
    
    
    
    0
    
    
    
    0
    
    
    
    3
    
    
    
    0.00
    %Accident & Health
    
    
    142
    
    
    
    107
    
    
    
    0
    
    
    
    35
    
    
    
    0.00
    %Group Life & Other
    
    
    2,760
    
    
    
    0
    
    
    
    0
    
    
    
    2,760
    
    
    
    0.00
    %Total Premiums
    
    $
    54,549
    
    
    $
    8,058
    
    
    $
    0
    
    
    $
    46,491
    
    
    $
    0.00
    %
 58




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##### Table of Contents



EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K) SequentiallyExhibit
    
    
    
    NumberedNumber
    
    Description of Exhibit
    
    Page3.1*
    
    Amended and Restated By-laws of Registrant10.1**
    
    1997 Annual Incentive Plan of Erie Indemnity Company10.2**
    
    Erie Indemnity Company Long-Term Incentive Plan10.3**
    
    Employment Agreement effective December 16, 1997 by and
between Erie Indemnity Company and Stephen A. Milne10.4**
    
    Employment Agreement effective December 16, 1997 by and
between Erie Indemnity Company and Jan R. Van Gorder10.5**
    
    Employment Agreement effective December 16, 1997 by and
between Erie Indemnity Company and Philip A. Garcia10.6**
    
    Employment Agreement effective December 16, 1997 by and
between Erie Indemnity Company and John J. Brinling, Jr.10.7***
    
    Employment Agreement effective June 30, 1999 by and
between Erie Indemnity Company and Jeffrey A. Ludrof10.8***
    
    Employment Agreement effective December 15, 1999 by and
between Erie Indemnity Company and Douglas F. Ziegler10.9***
    
    Addendum to Employment Agreement effective December 15, 1999
by and between Erie Indemnity Company and Stephen A. Milne10.10***
    
    Addendum to Employment Agreement effective December 15, 1999
by and between Erie Indemnity Company and Jan R. Van Gorder10.11***
    
    Addendum to Employment Agreement effective December 15, 1999
by and between Erie Indemnity Company and Philip A. Garcia10.12***
    
    Addendum to Employment Agreement effective December 15, 1999
by and between Erie Indemnity Company and John J. Brinling, Jr.10.13***
    
    Addendum to Employment Agreement effective December 15, 1999
by and between Erie Indemnity Company and Jeffrey A. Ludrof10.14****
    
    Addendum to Employment Agreement effective December 15, 2000
by and between Erie Indemnity Company and Stephen A. Milne10.15****
    
    Addendum to Employment Agreement effective December 15, 2000
by and between Erie Indemnity Company and Jan R. Van Gorder10.16****
    
    Addendum to Employment Agreement effective December 15, 2000
by and between Erie Indemnity Company and Philip A. Garcia
 59




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##### Table of Contents



EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K) SequentiallyExhibit
    
    
    
    NumberedNumber
    
    Description of Exhibit
    
    Page10.17****
    
    Addendum to Employment Agreement effective December 15, 2000
by and between Erie Indemnity Company and John J. Brinling, Jr.10.18****
    
    Addendum to Employment Agreement effective December 15, 2000
by and between Erie Indemnity Company and Jeffrey A. Ludrof10.19****
    
    Addendum to Employment Agreement effective December 15, 2000
by and between Erie Indemnity Company and Douglas F. Ziegler10.20*****
    
    Addendum to Employment Agreement effective December 12, 2001
by and between Erie Indemnity Company and Stephen A. Milne10.21*****
    
    Addendum to Employment Agreement effective December 12, 2001
by and between Erie Indemnity Company and Jan R. Van Gorder10.22*****
    
    Addendum to Employment Agreement effective December 12, 2001
by and between Erie Indemnity Company and Philip A. Garcia10.23*****
    
    Addendum to Employment Agreement effective December 12, 2001
by and between Erie Indemnity Company and John J. Brinling, Jr.10.24*****
    
    Addendum to Employment Agreement effective December 12, 2001
by and between Erie Indemnity Company and Jeffrey A. Ludrof10.25*****
    
    Addendum to Employment Agreement effective December 12, 2001
by and between Erie Indemnity Company and Douglas F. Ziegler10.26*****
    
    Summary of termination benefits provided Stephen A. Milne upon
voluntary termination from active employment on January 18, 200210.27#
    
    Employment Agreement effective May 9, 2002 by and between
Erie Indemnity Company and Jeffrey A. Ludrof10.28#
    
    Addendum to Employment Agreement effective December 12, 2002
by and between Erie Indemnity Company and Jan R. Van Gorder10.29#
    
    Addendum to Employment Agreement effective December 12, 2002
by and between Erie Indemnity Company and Philip A. Garcia10.30#
    
    Addendum to Employment Agreement effective December 12, 2002
by and between Erie Indemnity Company and John J. Brinling, Jr.10.31#
    
    Addendum to Employment Agreement effective December 12, 2002
by and between Erie Indemnity Company and Douglas F. Ziegler10.32#
    
    Employment Agreement effective December 15, 2002 by and
between Erie Indemnity Company and Michael J. Krahe
 60




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##### Table of Contents



EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K) SequentiallyExhibit
    
    
    
    NumberedNumber
    
    Description of Exhibit
    
    Page10.33#
    
    Employment Agreement effective December 15, 2002 by and
between Erie Indemnity Company and Thomas B. Morgan10.34##
    
    Addendum to Employment Agreement effective December 12, 2003
by and between Erie Indemnity Company and Jeffrey A. Ludrof10.35##
    
    Addendum to Employment Agreement effective December 12, 2003
by and between Erie Indemnity Company and Jan R. Van Gorder10.36##
    
    Addendum to Employment Agreement effective December 12, 2003
by and between Erie Indemnity Company and Philip A. Garcia10.37##
    
    Addendum to Employment Agreement effective December 12, 2003
by and between Erie Indemnity Company and John J. Brinling, Jr.10.38##
    
    Addendum to Employment Agreement effective December 12, 2003
by and between Erie Indemnity Company and Douglas F. Ziegler10.39##
    
    Addendum to Employment Agreement effective December 12, 2003
by and between Erie Indemnity Company and Michael J. Krahe10.40##
    
    Addendum to Employment Agreement effective December 12, 2003
by and between Erie Indemnity Company and Thomas B. Morgan10.41##
    
    Insurance bonus agreement effective December 23, 2003 by
and between Erie Indemnity Company and Jeffrey A. Ludrof10.42##
    
    Insurance bonus agreement effective December 23, 2003 by
and between Erie Indemnity Company and Jeffrey A. Ludrof10.43##
    
    Insurance bonus agreement effective December 23, 2003 by
and between Erie Indemnity Company and Jan R. Van Gorder10.44##
    
    Insurance bonus agreement effective December 23, 2003 by
and between Erie Indemnity Company and Philip A. Garcia10.45##
    
    Insurance bonus agreement effective December 23, 2003 by
and between Erie Indemnity Company and John J. Brinling, Jr.10.46##
    
    Insurance bonus agreement effective December 23, 2003 by
and between Erie Indemnity Company and Michael J. Krahe10.47##
    
    Insurance bonus agreement effective December 23, 2003 by
and between Erie Indemnity Company and Thomas B. Morgan13##
    
    2003 Annual Report to Shareholders
 61




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##### Table of Contents



EXHIBIT INDEX  SequentiallyExhibit
    
    
    
    NumberedNumber
    
    Description of Exhibit
    
    Page14##
    
    Code of Conduct16#
    
    Letter Regarding Change in Certifying Accountant20###
    
    Other Documents or Statements to Shareholders23##
    
    Independent Auditors Consent and Report on Schedules31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of theSarbanes-Oxley Act of 2002
    
    
    6331.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
    
    
    6432
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes  Oxley Act of 2002
    
    
    6599.1****
    
    Audit Committee Charter
  *
    
    Such exhibit is incorporated by reference to the like titled exhibit in
the Registrants Form 10-K Annual Report for the year ended December 31,
1998 that was filed with the Commission on March 9, 1999.**
    
    Such exhibit is incorporated by reference to the like titled exhibit in
the Registrants Form 10-K Annual Report for the year ended December 31,
1997 that was filed with the Commission on March 11, 1998.***
    
    Such exhibit is incorporated by reference to the like titled exhibit in
the Registrants Form 10-K Annual Report for the year ended December 31,
1999 that was filed with the Commission on March 28, 2000.****
    
    Such exhibit is incorporated by reference to the like titled exhibit in
the Registrants Form 10-K Annual Report for the year ended December 31,
2000 that was filed with the Commission on March 19, 2001.*****
    
    Such exhibit is incorporated by reference to the like titled exhibit in
the Registrants Form 10-K Annual Report for the year ended December 31,
2001 that was filed with the Commission on March 15, 2002.#
    
    Such exhibit is incorporated by reference to the like titled exhibit
in the Registrants Form 10-K Annual Report for the year ended
December 31, 2002 that was filed with the Commission on March 27,
2003.##
    
    Such exhibit is incorporated by reference to the like titled exhibit
in the Registrants Original Form 10-K Annual Report for the year
ended December 31, 2003 that was filed with the Commission on March 8,
2004.###
    
    Such exhibit is incorporated by reference to the like titled exhibit
in the Registrants Original Form 10-K/A Annual Report for the year
ended December 31, 2003 that was filed with the Commission on April 1,
2004. 62